Since the beginning of recorded history, gold has been a universal symbol of wealth. Because of its beauty and scarcity, ancient civilizations coveted the precious metal as a manifestation of status and power. Ornaments, jewelry, and early forms of money were all crafted from gold. From the time of ancient civilizations to the modern era, gold has been the world’s currency of choice. Today, investors buy gold mainly as a hedge against political unrest and inflation because of gold’s low correlations with other asset classes. In addition, we recommend a portfolio allocation in commodities, including gold, to lower overall portfolio risk.
Gold Bars / Coins
This is perhaps the best-known form of direct gold ownership. Many people still believe in investing gold in the form of bars and coins is more safe and continue to invest in the traditional form of coins and bars. While heavy gold bars are an impressive sight, their large size makes them illiquid, and therefore costly to buy, store them in lockers safely and sell. After all, if you own one large gold bar as your entire holding in gold, and then decide to sell part of it, you can’t exactly chop off the end of the bar and sell it. If you buy them as smaller coins, you will end up paying premiums on the gold price. It used to be 5% but now it reached more or less 10%. Every time, you do the transaction 10% loss is a huge loss. The main problems with gold bullion are that the storage and insurance costs and the relatively large markup from the dealer both hinder profit potential.
Gold ETFs / Mutual Funds
A Gold ETF is an exchange-traded fund (ETF) that is equivalent to the domestic physical gold price. Gold ETFs are units representing physical gold which are in de-materialized form. One Gold ETF unit is equal to 10 mg of gold and is backed by physical gold of very high purity. Gold ETFs combine the flexibility of stock investment and the simplicity of gold investments. Gold ETFs are listed and traded on NSE & BSE like a stock of any company in cash segment. Gold ETF can be bought and sold very easily during trading hours. Buying Gold ETFs nothing but purchasing gold in an electronic form. When you actually redeem Gold ETF, you do not get physical gold, but receive the cash equivalent. Trading of gold ETFs takes place through DMAT and a broker, which makes it an extremely convenient way of electronically investing in gold. Because of its direct gold pricing, there is a complete transparency on the holdings of a Gold ETF.
Please note there ETFs attract less fund management charges over Gold Mutual Funds.
Who should invest in Gold ETFs?
Gold ETFs are ideal for investors who wish to invest in gold but do not want to invest in physical gold due to the storage hassles / doubt about purity of gold and are also looking to get tax benefits. There is no premium or making charge, so investors stand to save money if their investment is substantial. What’s more, one can purchase as low as one unit (which is 10 milli grams). Investing in an ETF that is backed by physical gold, ETFs are best used as a tool to benefit from the price of gold rather than to get access to physical gold. So, when one liquidates Gold ETF Units, one is paid as per domestic market price of the gold. AMCs also permit redemption of Gold ETF Units in the form of physical gold in ‘Creation Unit’ size, if one holds equivalent of 1kg of gold in ETFs, or in multiples thereof. A tax efficient way to hold gold as the income earned from them is treated as long term capital gain. ETFs are accepted as collateral for loans.
How to buy and sell Gold ETFs?
Gold ETFs can be bought or sold at the stock exchange through the broker using a DMAT account and trading account. Since one is investing in an ETF that is backed by physical gold, ETFs are best used as a tool to benefit from the price of gold rather than to get access to physical gold. So, when one liquidates Gold ETF Units, one is paid as per domestic market price of the gold. AMCs also permit redemption of Gold ETF Units in the form of physical gold in ‘Creation Unit’ size, if one holds equivalent of 1kg of gold in ETFs, or in multiples thereof.
Gold Bonds
Sovereign Gold Bonds (SGBs) are government securities denominated in grams of gold. They are substitutes for holding physical gold. It is one of the preferred investment options for investors looking for secure investment. SGBs are issued in multiples of one gram of gold where the investors can easily invest in their DMAT account. Unlike physical gold which is an idle investment, 2.5% interest can be earned on sovereign gold bonds on semi-annual basis. Sovereign gold bond scheme can helps in portfolio diversification.
Tax Benefits
The taxation for Sovereign Gold Bonds is upon interest applicable as per the provisions of the Income Tax Act, 1961. In the context of SGB redemption, the capital gains tax levied on an individual is exempted. Also, long-term capital gains attract indexation benefits to an investor or when the bond is transferred from one person to another.
Investment Limits
An individual investor(trust) can buy 4 kg (20kg) of gold every year as the ceiling has been fixed on a fiscal year (April-March) basis. The sovereign gold bond price varies depending on different factors.
Tenure
SGBs have a maturity period of 8 years. However, the investor can exit the bond from the 5th year (only on the date of interest pay-out). The amount of investment also depends on the current sovereign gold bond price. It is a good strategy to buy SGBs if you are planning as long term investment option.
How to choose among the available options?
As we have seen, there are multiple ways to invest in gold like ETFs, SGBs, Coins / Bars, Ornaments.
Investing for long term / Investing for kids marriage etc?
Gold has an important role to play in Indian marriages. People buy large quantities of gold during marriages. So most people tend to accumulate ornaments or coins for kids marriages. If you buy latest design ornaments of current times, by the time your kid grows those could become old. You will end up melting the gold and buying new ornaments where you incur losses. Instead, SGBs are good alternatives for this purpose. Where you can invest in gold for long term, continue to earn interest and the returns are tax free.
Investing for liquidation / to avoid stock market risks?
It is a good strategy to invest certain percentage of your equity investment into gold as it helps to liquidate during recession or wars or pandemic like COVID 19 etc. More over, gold prices would raise in these situations while the stock markets go down. Gold ETFs are the best instruments to invest for this purpose.
What is the best way to buy gold ornaments?
In India, there are two ways to invest in gold ornaments:
You can just walk-in to the shops and identify the good model and make the payment and walk away with the ornament. Generally this approach attracts additional making and wasting charges generally starts around 18% to 30% depending on the models.
The other approach is, you can identify the shop that offers best models and join the gold savings schemes. Generally, gold accumulated by investing in this scheme will not attract making charges (unlimited / up to certain percentage). But most cases, the gold accumulated is very less compared to the item that you actually want to buy or you end up taking smaller items limiting within accumulated gold.
Best way to buy ornaments is the mix of both Gold ETFs and gold savings schemes. First of all, you need to identify the target ornament that you would like to buy and an average weight of the ornament. Example you would like to buy necklace of weight 100 grams. You need to start accumulating the gold ETFs in your DMAT up to 100 grams. Once you have equivalent weight is accumulated, join the gold savings scheme. In this scheme, monthly investment should be roughly equivalent to 9 grams in a 11 months scheme. You can sell the Gold ETFs equivalent to 9 grams and pay in the scheme every month. You can get into higher monthly commitments without any fear as the equivalent gold is already accumulated. Now the 100 grams necklace can be purchased without any making charges. You can get into higher monthly commitments without any fear as the equivalent gold is already accumulated. Now the 100 grams necklace can be purchased without any making charges. 18% to 30% savings by investing over a period of one year is a huge savings.
Conclusion
Gold Mutual Funds, Gold ETFs and SGBs are three simple and better ways to invest in gold in digital form. Depending on your individual needs and investment horizon, you can select the best investment option. Investing in gold through SIP in Gold Mutual Funds without worrying about maturity period is very convenient option.
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