In India, gold is perceived as both a precious metal and a symbol of good fortune for a variety of reasons. This metal is often passed down from one generation to the next and is associated with important events, such as weddings and other celebrations. In addition to its cultural significance, gold can also be a valuable investment option. Investors can choose to invest in assets that offer long-term returns, such as stocks or passive income sources, such as peer-to-peer lending or mutual funds.
Individuals often invest in gold through various forms, including coins, bars, or by investing in the underlying assets of gold exchange-traded funds (ETFs), gold mutual funds, or digital gold.
In this article, we will look at the main Gold investment options accessible in India and evaluate them based on key factors like availability and risk, return liquidity, cost, etc.
Did you know?
- Gold has consistently beaten the inflation rate over the past 15 years
- Gold has averaged an annual return of 9.6 percent over the last 40 years
- Gold is seen as a safe haven in times of uncertainty
- Gold shows its best performance during periods of volatility/underperformance of stocks
- Gold is not just commodity but a currency as it protects value of money during times when currency depreciates
- Demand for Gold is strong yet supply is constrained as mining production has dropped
- Central Banks in several countries have increase their gold holdings instead of selling.
Benefits of investing in Gold
The price of gold is not affected at all, even during times of recession, compared to other assets such as stocks. Therefore, investors prefer adding gold to their portfolios to benefit from the steady price and increase in value.
Simple to Purchase
When you have the required money, buying gold is simple. It is important to confirm that the gold you purchase is confirmed pure. This valuable metal is available in a wide range of forms, including gold coins, jewellery, and bars, and can be purchased from a reputable jeweller.
Better versus Inflation
Fixed deposits aren't able to outperform inflation as gold, even though both investment options are traditional investments.
The past data suggest that gold has a strong performance against inflation in times of economic highs and lows.
Whenever the economy is down, and currency prices drop, so do the prices of currencies.
If the currency has low or no value, then the prices of gold will go up because it is priced with that same unit of currency.
This suggests that gold is among the best options to protect yourself against inflation.
The fact that it's an indefinite metal doesn't appear to impact the value of gold. Its value is reported to increase in the long run. However, gold prices may fluctuate in the short term.
Gold is good collateral to secure loans. It is simpler to obtain a loan with gold because gold is an asset that can be redeemed and has the highest value. This can be beneficial during an emergency.
Gold Investment Options in India
It's important to note that the performance of various gold investment options, such as coins, bars, or gold-based exchange-traded funds, mutual funds, or digital gold, can be tied to the fluctuation in the value of gold.
Here is a short overview of the different investment options available:
When you want to invest in Gold, you can choose either physical or digital format. In physical form, Gold as an investment is stored as coins, jewelry bars, coins etc.
There are, however, some key disadvantages to the investment in physical gold.
- Charges for design and making make purchases are costly.
- Storage expenses can be incurred in connection with the security and insurance requirements.
- Selling can be difficult because of the possibility of contamination and the requirement for purity and origin certificates.
- Jewellery and other physical gold items are always susceptible to being stolen due to their high price and value.
Digital Gold can be purchased via various provider starting from 1 gram.
Digital Gold lacks regulatory oversight since it currently doesn't have any regulatory bodies like SEBI or RBI.
In addition, three players control this market in India, including Augmont Gold, MMTC-PAMP India, and SafeGold, increasing the risk associated with the investment.
Gold Exchange Traded Funds trade on exchanges as shares and typically feature Physical Gold and Gold refining or mining stocks as the principal asset base.
The Demat (Dematerialized) account is required to invest in ETFs of Gold.
Gold Mutual Funds
These can be described as mutual funds run by various assets management firms (AMCs) that follow an arrangement of funds and invest primarily into Gold ETFs.
The fund seeks to provide returns that closely correspond to return provided by ETF which in turn invest in physical gold. It enable to realize returns of gold in paper form without the need of a demat account.
It is a passively managed fund which would enable an investor to save for gold in a convenient manner either through lump sum investment or through systematic investment – the mutual fund way from a long term perspective. It will give investors the opportunity to participate in the bullion market in a relatively cost effective and convenient way.
Reason Invest in Gold Fund
- Systematically invest in Gold each month through SIPs
- Buy Gold in amount as small as 500 without having to worry about purity
- No Demat account to required
- Buy/ Sell unit of Gold Fund on any business day at NAV based price
- No storage charges, no making charges, no safe keeping worries
- Hedge against Inflation
- Less volatile
- Lesser charges
Sovereign Gold Bonds
These bonds are regularly released from the Reserve Bank of India (RBI) and are available for purchase at the top private and public sector banks. The returns are based on the gold prices and are insured by the GOI. They don't have physical gold as a source of income.
Government utilizes gold's price as a reference point and issues bonds that guarantee regular installments of interest (at 2.5 percent p.a.) and the value of the investment at the time of Maturity.
The sovereign default risk that applies to Sovereign Gold Bonds is because this product is not secured by physical gold but is instead a derivative from Gold issued by the Government of India through the Reserve Bank of India (RBI).
A sovereign default is when it is the case that the Government of India is not in a position to make the scheduled payments on its debt.
Method of Holding
Dematerialized (Electronic Form)/ Physical unit of the scheme
Mutual Fund Unit, No demat account required
Security of Gold
Investor is responsible
Fund take a responsibility
Fund take a responsibility
Risk of Theft
Convenience in Buying / Selling
Less convenient, as gold needs to moved physically
More convenient, as held in Demat account
Can invest regularly through sips
Making charges incurred
No charges are required
No charges are required
Conditional and uneconomical
At secondary market price
At NAV base price
Capital Gain Tax
Only after 3 year
After 1 year
After 1 year
Taxation of Gold Investment Options
The primary taxation for gold investments is triggered when you sell your investment or at the time of the investment's Maturity.
Capital gains tax rules are applicable for Physical Gold, Digital Gold, Gold ETFs, and Gold Mutual Funds.
According to the period for holding for your investments, i.e., the time between the purchase and selling of your investments, and the rules for either short Term Capital Gains (STCG) or Long Term Capital Gains (LTCG) rules could be in place.
Taxation for Sovereign Gold Bonds
There are four possible ways in which your investment can be taxed, and they are in the following order:
Taxation on Interest:
The interest paid through Sovereign Gold Bonds (currently 2.5 percent p.a.) is tax-free. The tax is added to the tax-deductible income for the current FY and is taxed following the slab rate applicable to you.
Taxation for Premature Redemption:
If you decide to early cash out your investment after 5 years have passed, the profits are tax-free. The RBI typically provides redemption windows every six months following the five-year lock-in. These windows could be used to complete the premature cash-out.
Taxation on Maturity:
If you hold Sovereign Gold Bonds until expiration and cash them upon the 8-year holding period, any profits from the investment are tax-free.
Taxation of Securities Market Sale:
If you redeem your bonds via the secondary market, you will be taxed based on the Capital Gains taxation rules. Therefore, the STCG or LTCG tax rate will be applied to your investment based on the period of holding the bonds.
Investing in Gold is good option. The long term outlook for gold looks positive. Any correction may be looked as opportunity to accumulate and long term prudent investor should continue investing in gold in a phased manner as it likely to improve risk adjusted returns for the portfolio.
If you chose as investment option then gold jewelry is not good option. Gold Fund provide low exit load you can use this option for short term.