Throughout history, few investments have rivaled gold in popularity as a hedge against almost any kind of trouble, from inflation, to economic upheaval or currency fluctuations, to war.
Gold is one of the most preferred investments in India. High liquidity and inflation-beating capacity are its strong selling points, need not to mention the charm and prestige associated with gold. Gold prices usually shoot up when the markets face turbulence.
Although, there are phases when markets witness a fall in gold prices, it doesn't last for long, and usually makes a steady comeback.
When you think about investing in gold, don’t restrict yourself to just buying physical gold, like coins or bullion. Alternatives to invest in gold include buying digital gold, gold derivatives, shares of gold mining companies or gold exchange-traded funds (ETFs).
You can also invest in gold by trading options and futures contracts, let's discuss this in detail.
How to Invest in Gold?
Here is the ‘golden question’ – how does one invest in gold? Traditionally, it was by buying physical gold in the form of coins, bullions, artefacts, or jewellery. However, there are newer forms of gold investments nowadays, such as gold ETFs (exchange-traded funds), gold mutual funds, and gold derivatives.
Simply put, Gold ETFs are similar to buying an equivalent sum of physical gold but without the hassles of having to store the physical gold. Hence, there is no risk of theft/burglary as the gold is stored in Demat (paper) form. Gold funds involve investing in gold mining companies. Sovereign Gold Bonds are a form of digital gold issued by RBI.
Let's discuss their features one by one:
Gold:
- It is an investment in physical gold.
- Investor does not need any Demat Account for the purchase.
- Market fluctuations directly affect the prices of gold.
- No additional charges other than the physical gold itself (and the government taxes)
- Risks of theft and burglary associated with storing physical gold.
- Best suited for conventional investors
Gold ETFs (Exchange Traded Funds):
- The investor buys a proportionate value of gold but not in the physical form.
- The investor needs a Demat Account.
- Changes in the gold prices affect that of Gold ETFs.
- Gold ETFs involve asset management and brokerage fees.
- Gold ETFs remove the burden of trading gold in the physical form.
- Best suited for investors who have the required time and skillset to invest.
Gold Funds:
- The investment is made in bullion and companies involved in mining gold.
- Many Gold mutual funds include silver, platinum, and other metals as well in their investment basket.
- It works on the principle of diversifying, i.e. not putting all eggs in one basket.
- A mutual fund manager on behalf of an asset management company manages the gold fund.
- No need for a Demat account to invest.
- Changes in the gold prices don’t affect gold funds directly.
- There’s a minimum charge to manage the gold funds.
- Eliminates the risk of theft/burglary and buffers investments to changing market fluctuations.
- SIP available.
- Best suited for investors who expect high returns by taking calculated risks.
Sovereign Gold Bonds (SGB):
- It is the safest way to buy digital Gold.
- Sovereign Gold Bonds are issued by the Reserve Bank of India on behalf of the Government of India.
- Provides an assured interest of 2.50% per annum.
- The bonds are denominated in units of grams of gold with a basic unit of 1 gram, the maximum investment one can make is 4 kg.
- These bonds have a tenor of eight years with an exit option from the fifth year onwards.
- It’s again a hassle-free way of gold investing as you have the ownership of gold without any physical possession.
What Documents do you need to Invest in Gold?
More than Rs. 2 lakhs of investment in physical gold demands for the PAN Card, whereas in ETFs, you shall have to open an account with a brokerage firm followed by a Demat account with the same firm. For investing in SGBs (Sovereign Gold Bonds), KYC norms require the documents required to buy physical gold (Aadhar, PAN, Voter ID or Passport).
Why Should You Invest in Gold?
A very important question which might cross your mind is, why gold when we have so many other options.
Safety, liquidity, and returns are the three criteria most risk-averse investors look for before investing. While gold meets the first two criteria without any hiccups, it doesn’t perform poorly at the last one either.
Here is why you should invest in gold:
- Investing in gold is worthwhile because it is an inflation-beating investment. Over time, the return on gold investment has been in line with the rate of inflation.
- Gold has an inverse relation with equity investments. For example, if the equity markets start going down, gold would typically perform well as a hedge instrument. Considering gold as an investment option in your investment portfolio will be a buffer to the overall volatility of your portfolio.
Which gold option to choose?
The initial cost of owning physical gold in the form of bars or coins is anywhere around 10 percent and it is even higher for jewellery. SGB and Gold ETF, both paper-gold, are cost effective as there is no entry cost in SGB while costing for Gold ETF could be around 1 percent.
SGB should benefit those who want to invest in gold for a longer period as its maturity is after 8 years, although the lock-in ends from the fifth year. However, Gold ETF provide much better liquidity than SGB. Owning units is much easier than SGB as it's entirely online in case of ETFs. The risk of owning, holding also doesn't exist in both.
The big difference is on the taxation front. Gains in SGB on redemption are tax-exempt but gains in Gold ETFs after 3 years are subject to 20 percent tax post indexation.
The only disadvantage with Gold ETFs is that its units won't earn the additional interest of 2.5 per cent per annum like you would get for SGBs.
Once you decide as to why you need to invest in gold - is it for marriage purpose or for pure investment. For investments, one should not have more than 10 percent of the total portfolio in gold.
With Your ShareIndia Digital Account, you can choose from multiple types of gold investments, along with other commodities, currencies and equities. Sign up for a new account here in a few easy steps, and start investing in no time!
Disclaimer: Any Advice or information in the post is a general advice for education purpose only and is not responsible for generating any trading profit for anyone, please do not trade or invest based solely on this.
