Gold, renowned as one of the most esteemed precious metals worldwide, is widely acknowledged as a valuable investment instrument. During periods of inflation, gold has demonstrated its ability to deliver superior returns compared to most other investment vehicles. Traditionally, individuals in India have invested in gold by acquiring physical forms such as coins, bars, and jewelry. However, alternative avenues for gold investment have emerged, and it is crucial to explore these options comprehensively to understand the potential benefits they offer.
Table of Contents
Methods for Investing in Gold in India
Gold investment instruments can be broadly categorized into the following:
- Buying Physical Gold: This entails the direct purchase of gold bars, coins, or ornaments.
- Gold Exchange-Traded Funds (ETFs): These funds provide a means to invest in gold without physically possessing it.
- Gold Mutual Funds: Various gold funds directly or indirectly invest in gold.
- Sovereign Gold Bonds (SGBs): These bonds, issued by the Reserve Bank of India on behalf of the government, enable gold investment on a per unit basis.
- Digital Gold: An increasingly popular option, it allows for the virtual purchase of gold.
Investing in Physical Gold
Purchasing physical gold is the most straightforward and direct method of investing in this precious metal. By acquiring gold coins, bars, or jewelry from the market, you can store them securely at your residence or another convenient location.
Advantages:
- Minimal paperwork and formalities compared to other gold investment forms.
- Absence of the need for a Demat account to purchase physical gold.
- Direct correlation between changes in gold market prices and the value of your gold holdings.
- No additional charges, aside from the gold price, when making a purchase.
Disadvantages:
- Potential vulnerability to fraudulent activities when buying gold independently.
- Dependence on the trustworthiness of sellers during various stages of the transaction.
- Risks associated with theft or burglary when physically possessing gold.
- The necessity to store gold in a safe and secure location to avoid damage.
Investing in Physical Gold: How-To Guide
The initial step is to identify a trustworthy goldsmith or retailer specializing in gold. Familiarize yourself with hallmarks and other essential information related to gold before making a purchase. It is advisable to stay updated on the prevailing mar
ket price of gold and associated charges. For investment purposes, prioritize coins or bars with minimal making charges. Upon payment, retain the purchase receipt securely alongside the gold.
Gold Exchange-Traded Funds (ETFs)
Gold ETFs represent a direct means of investing in gold without physical possession. These passive funds function similarly to stocks and are traded on stock exchanges. Each unit of a gold ETF corresponds to the value of 1 gram of gold with 99.5% purity.
Advantages:
- The ability to invest in gold proportionate to the desired investment amount, without physical ownership.
- Ease of buying and selling gold ETF units promptly and conveniently.
- Mitigation of risks associated with theft or burglary since physical possession is not involved.
- Direct impact of gold price fluctuations on the investment’s value.
- Elimination of concerns regarding physical wear and tear.
Investing in Gold ETFs: How-To Guide
To invest in gold ETFs, it is necessary to open a Demat account with a broker. Complete the required formalities, such as Know Your Customer (KYC) verification and bank account verification. Compare different Gold ETF options provided by various fund houses before making an informed investment decision. Gold ETFs are actively traded on stock exchanges, enabling you to place buy orders based on market or limit prices. Once the units are purchased, they will be visible on your dashboard.
Disadvantages:
- Involvement in paperwork and formalities, including KYC and account verification, to invest in gold ETFs.
- Requirement to open a Demat account with a broker offering gold ETF investments.
Top Gold ETFs in India
| Gold ETF | 1-year Return | 3-year Return | 5-year Return |
|---|---|---|---|
| Goldman Sachs Gold BEes | 7.5% | -1.7% | 6.8% |
| R*Shares (Reliance) Gold ETF | 7.2% | -1.9% | 6.8% |
| SBI Gold ETF | 7.3% | -1.7% | 7.0% |
| HDFC Gold ETF | 7.0% | -1.9% | 6.7% |
| UTI Gold ETF | 7.1% | -1.9% | 6.8% |
Gold Mutual Funds
Gold mutual funds provide an indirect avenue for gold investment. Unlike direct investments in physical gold, gold mutual funds invest in stocks of gold mining and producing companies, as well as gold distributing syndicates. The stock prices of these entities do not solely rely on the market price of physical gold.
Advantages:
- Active management by experienced and professional fund managers, aiming to generate higher returns.
- Potential to hedge against market volatility and inflation, historically resulting in superior performance during economic pressures.
- Possibility of benefiting from gold producing/mining companies’ stock performance, even if the commodity gold underperforms.
- Easy investment process, including the option to initiate a Systematic Investment Plan (SIP).
- No Demat account required for gold mutual fund investments.
Disadvantages:
- Mandatory KYC compliance for investing in gold mutual funds.
- Incurrence of charges, such as expense ratios and entry/exit loads, associated with gold mutual fund investments.
- Lack of direct correlation between gold price increases and the investment’s returns.
Investing in Gold Through Mutual Funds: How-To Guide
Choose a mutual fund app that facilitates gold mutual fund investments. Create an account and complete the KYC verification process. Explore the mutual funds section, filtering out gold mutual funds based on their past performance and holdings. Specify the desired investment amount and submit the investment request. Once the mutual fund units are allocated, they will be displayed on your dashboard.
Top Gold Funds in India
| Gold Fund | 3-year Return | 5-year Return | Return in 2021 |
|---|---|---|---|
| Kotak Gold Fund | 14.4% | 10.5% | 26.6% |
| Axis Gold Fund | 14.2% | 10.2% | 26.9% |
| SBI Gold Fund | 13.8% | 10.2% | 27.4% |
| ICICI Prudential Regular Gold Savings Fund | 13.7% | 9.7% | 26.6% |
| HDFC Gold Fund | 13.6% | 10% | 27.5% |
Sovereign Gold Bonds (SGBs)
SGBs, issued by the Reserve Bank of India on behalf of the central government, allow investors to purchase gold on a per unit basis. Each unit represents 1 gram of gold with a purity of 999. The price per unit is determined by averaging the closing prices of gold over the last three sessions. SGBs are issued in multiple tranches throughout a financial year, with subscription periods specified for each tranche. These bonds bear a fixed interest rate of 2.5%, credited semi-annually.
Advantages:
- Fixed rate of interest offered by the government, regardless of fluctuations in gold prices.
- Availability of SGBs in both paper and dematerialized form, eliminating the need for physical possession.
- Taxation benefits, including exemption from capital gains taxes after maturity and exemption from TDS on interest received.
Disadvantages:
- Extended maturity period of 8 years, which surpasses the tenures of other investment instruments.
- Possibility of capital losses if gold prices decline within the 8-year investment duration, though long-term gold price trends have generally been positive.
Investing in SGBs: How-To Guide
Investing in SGBs can be easily done online through platforms like Paytm. Alternatively, various banks approved by the RBI allow the purchase of SGBs. Net banking accounts are essential for making payments when buying SGBs. Additionally, brokers with Demat account services that support SGB investments offer an alternative avenue. In any case, a registration form must be completed, specifying the subscription quantity.
Buying Digital Gold
Digital gold investment differs from physical gold investment in that the purchased gold does not need to be physically held. Instead, the seller stores the acquired gold units in secured vaults.
Advantages:
- Investment as low as Re 1 in digital gold.
- Option to redeem purchased gold in physical form, such as coins or bars, with doorstep delivery.
- Secure storage of purchased gold by the seller.
- Ability to utilize the investment as collateral for loans.
Disadvantages:
- Investment limits, typically capped at Rs 2 lakhs on most platforms.
- Incurrence of storage charges.
- Delivery charges for redeeming purchased gold in physical form.
How to Buy Digital Gold
Currently, digital gold is offered by Augmont Gold Ltd., MMTC-PAMP India Pvt. Ltd., and Digital Gold India Pvt. Ltd. Various apps facilitate the purchase of digital gold from these sellers. Select the preferred platform for buying digital gold and indicate the desired investment amount or gold quantity. Ensure completion of the KYC verification process, and choose a suitable payment method. After the payment is made, the purchased gold will be stored securely in a locker. Physical delivery of the gold is also possible.
Gold Prices Over the Past Decades
| Year | Price (24 Karat per 10 grams) |
|---|---|
| 1970 | Rs 184 |
| 1980 | Rs 1,330 |
| 1990 | Rs 3,200 |
| 2000 | Rs 4,400 |
| 2010 | Rs 18,500 |
| 2020 | Rs 48,651 |
Why Should You Invest in Gold?
Protection Against Inflation:
Gold has demonstrated a tendency to surge in price during periods of inflation. When other investments underperform, investing in gold through any of the aforementioned methods can compensate for potential losses.
A Good Savings Option:
Gold, as a highly liquid asset, has consistently offered superior returns compared to other liquid savings schemes over the years. Allocating a portion of your savings to gold or gold-based investment instruments enables liquidity and the potential for higher returns.
Price Stability:
In contrast to stock market securities, gold prices have exhibited considerable stability over the years. As a result, gold can be viewed as a reliable long-term investment option.
Multiple Investment Options:
Gold investments are no longer limited to physical acquisition. Investing in Gold ETFs, Gold mutual funds, and SGBs provides flexibility in investment choices.
Loan Availability:
Gold can serve as collateral for loans, attracting attractive interest rates.
In summary, investing in gold stands as an excellent means of diversifying investment portfolios and reducing overall risk. Gold serves as a safeguard during challenging economic times when other investments may falter. Thanks to its high liquidity, potential for substantial long-term returns, and a variety of investment options, gold continues to captivate the attention of investors.
Frequently Asked Questions (FAQs)
What is the historical performance of gold as an investment?
Gold has shown a history of long-term appreciation, with its price generally increasing over time. However, it’s important to note that past performance is not indicative of future results.
Is gold a safe investment?
Gold is often considered a safe-haven investment due to its ability to retain value during economic downturns and serve as a hedge against inflation. However, all investments come with some level of risk, and it’s essential to diversify your portfolio.
What are the different ways to invest in gold?
There are various methods to invest in gold, including buying physical gold (coins, bars, jewelry), investing in gold ETFs, gold mutual funds, Sovereign Gold Bonds (SGBs), or purchasing digital gold.
What are the advantages of investing in gold ETFs?
Gold ETFs provide a convenient way to invest in gold without physically owning it. They offer liquidity, easy tradability on stock exchanges, and protection against theft or burglary associated with physical gold.
How do I invest in Sovereign Gold Bonds (SGBs)?
To invest in SGBs, you can apply through designated banks or authorized brokers. The subscription periods are announced by the Reserve Bank of India. SGBs can be held in both physical and dematerialized form.
What are the tax implications of investing in gold?
The tax treatment of gold investments varies depending on the holding period and the investment instrument. Consult with a tax advisor to understand the specific tax rules and exemptions applicable to your investment.
Can I invest in gold through SIP (Systematic Investment Plan)?
Yes, you can invest in gold mutual funds through SIP, which allows you to invest a fixed amount at regular intervals. It provides the benefit of rupee-cost averaging and systematic investing.
How do I determine the purity of physical gold?
Physical gold is typically stamped with a hallmark that indicates its purity. Look for recognized hallmarks and seek guidance from reputable jewelers or goldsmiths to ensure authenticity.
What are the risks associated with investing in gold?
While gold is generally considered a stable investment, its price can still fluctuate. Additionally, factors such as global economic conditions, currency movements, and changes in supply and demand can impact the value of gold investments.
Should I allocate a certain percentage of my portfolio to gold?
The allocation to gold in your portfolio depends on your investment goals, risk tolerance, and overall portfolio diversification strategy. It is advisable to consult with a financial advisor to determine the appropriate allocation based on your individual circumstances.
