Now you know that gold is a golden investment, it’s only imperative to know how to make it a part of your portfolio.
Does buying jewellery qualify as an investment?
Or do you need to buy gold coins and bars?
Is there a way to digitally buy gold?
How can you guarantee that you’re buying it in the purest form?
Will you have to pay taxes on the gains?
Any individual buys gold for two main purposes:
- Adornment – gold bought in the form of jewellery for consumption.
- Investment – gold bought purely as an investment instrument.
As per statistics, about 80% of the gold mined is converted into jewellery. It is the most standard use of gold and is common amongst all cultures. Because of its shine, lustre and durability, it is believed to bring prosperity and wealth in many cultures, especially Asians, who convert gold into Bangles, Rings, Necklaces etc.
Gold that is bought for adornment is not considered as an investment instrument.
Gold as investment can be broadly categorised into:
- Physical Gold – This refers to Gold that is bought in physical form as bullion. Gold Bullion refers to buying this precious metal in the form of coins, biscuits or bars of highest purity (99.9% or 24-karat). This method is best suited for traditional investors.
Physical gold cannot be stored as easily as other financial assets. It takes up lots of space and comes with the added risk of loss or theft. When buying, and storing physical gold of any sort, you should ensure that you have loss and theft insurance.
Along with the fact that its purity is hard to gauge, different vendors offer different prices. People are also often disappointed at the price they are offered when it comes to selling their gold.
- Paper Gold – This refers to Gold held in non-physical forms such as Bonds, Digital Gold, Mutual Funds, etc.
This is similar to buying an equivalent sum of physical gold but without the hassles of storing, thus eliminating the risk of theft/burglary.
The different forms of paper gold are:
- Gold Exchange Traded Funds (ETFs)
Buying Gold ETF is similar to investing in the stock market. The investor buys a proportionate value of physical gold which is held in a dematerialised form. Changes in the price of physical gold also impact the price of ETFs. Each unit of a Gold ETF represents 1 gram of 24-karat physical gold. An investor is required to open a DEMAT account as these are traded on the stock exchange. Gold ETFs provide ample liquidity as they can be sold on exchanges anytime. ETFs attract brokerage and asset management fees. This form of investment is best suited for dedicated and skilled traders.
ETFs now hold more gold than every central bank, with the exception of the US Federal Reserve.
It is advisable to keep a portion of Emergency Fund in Gold ETFs as they can be the fastest to liquidate.
- Gold Mutual Funds
These are open-ended mutual funds that invest in Gold ETFs. They are thus referred to as fund of funds. Just like other mutual funds, gold schemes can be purchased and redeemed at Net Asset Values and can also be invested in through the Systematic Investment Plan (SIP) mode. Gold funds have higher liquidity than other modes of investment in gold, as they can be redeemed directly from the fund houses on any business day. Higher liquidity, along with the availability of Systematic Investment/Transfer/Withdrawal Plans in gold funds, allows higher flexibility to investors in implementing their asset allocation strategies. However, since these funds invest in ETFs they have a double impact on commission, making them more expensive and less attractive vs a direct investment in ETFs.
- Digital Gold
It’s a product offered by vendors and refiners of gold through various means, including wallets such as Paytm & Amazon Pay and investment platforms such as Kuvera, Groww and stockbrokers.
There are three companies currently offering digital gold in India: Augmont Gold; MMTC-PAMP India Pvt. Ltd., a joint venture between state-run MMTC Ltd. and Swiss firm MKS PAMP; and Digital Gold India Pvt. Ltd. via its SafeGold brand.
Some of the advantages of Digital gold are that it has a wide reach and offers the investor an option to invest in gold at as low as Rs. 1.
However, it is highly risky as there is a lack of a regulator (unlike Securities and Exchange Board of India (SEBI) for ETFs and the Reserve Bank of India (RBI) for Bonds) who oversees the authenticity of the third parties involved in this trade. There is also a 3% GST levied on purchases making it a less attractive medium.
- Gold Mining Stocks
Investors can also invest in shares of gold mining companies. Gold mining company stocks may correlate with the price of gold. However, the growth and return from these stocks also depends on the expected future earnings of the company, not just on the value of gold.
- Sovereign Gold Bonds
These are bonds backed by the Government of India to raise funds and are issued in tranches. The RBI opens up windows during which investors can invest in SGBs. The minimum investment is 1 gm while the maximum purchase is limited to 4kg per individual. There is a guaranteed interest of 2.5% per annum payable bi-annually to the investor making it the most attractive instrument to invest in gold. The same is taxed as per the applicable tax bracket. This offers a dual benefit of interest along with appreciation in the value of Gold. Liquidity is a problem since it has an 8-year lock in period with an option to exit after 5 years. However, these can be traded before maturity in the secondary market. The major advantage that comes with this instrument is that the Long-Term Capital Gain (LTCG) is exempt from tax if the bond is held for 8 years until maturity. Any redemption prior to that will attract a LTCG Tax of 20%.
Another advantage of SGBs is the ability to use them as collateral for availing bank loans.
Some people suggest that gold should account for up to 10% of an investment portfolio. Since bonds and equities tend to be positively correlated, in a period of rising inflation it can spell disaster for a typical 60:40 portfolio. That’s why gold is an interesting addition to any investment portfolio – because it provides an alternative.
Get clarity as to why you want to invest in gold and choose between Gold ETFs or SGBs depending on how comfortable you are with managing investments online and keep the worries of purity, safety aside. In short, all those investors who don’t need funds in the short term can opt for Sovereign Gold Bonds and investors who prioritize liquidity, should go for Gold ETFs and Mutual Funds.