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5 ways to invest in Gold.

Photo courtesy Peggy_Marco on Pixabay.

The love of Indians for gold has been well known over the centuries. During the early Indo-Roman trade about 120 ships used to sail from Myos Hormos to India. People in the West were fond of Indian goods like textiles, spices, and jewelry but Indians did not like Western products, so the Western merchants had to pay the balance in gold and silver. Roman senators complained that their women were using too much of Indian luxuries and spices and Pliny the Elder called India the ‘sink of world’s gold’. The gold coins were first introduced in India by the Indo-Greeks around 270 BC.

In South India, the temple was the center of religious, social, and economic life and the kings and merchants donated a large amount of gold and precious stones to achieve ’Punya'(holy, pure, and good deeds). The village assembly often met in temples to take decisions. Gold is known to adorn deities in temples, is a symbol of Goddess Laxmi, and is considered auspicious. The Padmanabh Swamy temple in Kerala is estimated to have 1300 tons of gold, almost two times the Indian government reserve of 618 tons of gold.

Households in India hold around 24,000 to 25,000 tons of gold mostly used by women and amounts to 11% of the gold in the world. This is much more than the gold reserves of the IMF, USA, Germany, Italy, and France taken together and constitutes around 40% of India’s nominal gross domestic product (GDP). The people living in rural India hold two-thirds of this gold as financial savings. Women in India like to purchase gold as they consider it a good financial investment that can be easily passed to the next generation, enhances the social status, and is durable.

The urban millennial are less emotionally connected to gold and the rise in the number of Demat account for the purchase of stocks and wallets for cryptocurrency is proof of that but still, a significant number of them purchase gold during the festivals.

Gold Price History in India – Every decade wise for the past 90 years.

In the last 50 years, gold has given a compounded growth return of 11.5% and for the last 90 years, it is a 9% compounded return. Before the 1930s the world economy was not expanding at a fast rate so the returns on gold were not much and it was mainly used as a storage option. The common person did not have the convenience and ease of investing in other asset classes like the present so they used to store gold in a safe or in their houses.

A person can invest in gold in the following ways-

1) Gold Mutual Funds:-

A Gold mutual fund invests in physical gold and stocks of gold mining companies. The value of the fund is dependent on the performance of the gold industry. It is good for persons who want to diversify the risk in their investment portfolio. The advantages of investing in a gold mutual fund are:-

  • An investor can start to invest with a small amount like Rs. 500 and it is beneficial for persons who can’t invest a large amount. It is a better option as compared to the physical gold where a person has to invest a large amount.

  • The mutual funds are easily available and accessible.

  • There is a great amount of transparency as these funds are regulated by SEBI.

  • Investment in a gold mutual fund allows a person to diversify his overall portfolio risk thereby reducing too much volatility in the portfolio.

  • It is held in dematerialization form and is much safer to hold than physical gold. Physical gold can be stolen and there may be storage charges.

  • The gold funds are managed by experts who keep a track on all the aspects in the movement of prices and other factors.

  • These funds are tax efficient and help on saving taxes. The long term capital gains (when invested for more than 36 months) from mutual fund are subject to indexation benefits. These funds are taxed similar to that of debt funds. If you are invested for less than 36 months(STCG),the gains are taxed according to the income tax slab and added to the gross income to calculate tax.

  • Gold is a safe haven during times of uncertainties, like during the time of coronavirus pandemic the price of gold appreciated when all the other asset class prices were falling.

Some of the gold mutual funds in India are – Axis Gold fund, Aditya Birla Sun life gold fund, HDFC gold fund, ICICI Prudential regular gold savings fund, IDBI gold fund, Kotak gold fund, SBI gold fund, Nippon India gold savings fund.

2) Sovereign Gold bonds:-

The Sovereign gold bonds are the government securities issued by the Reserve bank of India and denominated in grams of gold (1 unit = 1 gram). It carries sovereign guarantees both on redemption amount and the interest. The advantages of Sovereign gold bonds are:-

  • The sovereign gold bonds earn an assured 2.50% interest per annum on the initial investment.

  • There are no disadvantages of handling physical gold.

  • There is a sovereign guarantee on both the redemption amount and the interest.

  • The bond can be redeemed from the fifth year onwards and the tenure of the bond is  eight years. So there is an easy exit option.

  • The sovereign gold bonds are tradable on the National Stock exchange of India. They are available both in paper and demat form. It can be transferred to any other eligible individual.

  • The sovereign gold bonds can be used as collateral to get loan from banks, financial institutions, and NBFCs.

  • The bonds are issued in denominations of 1 gram of gold and in multiples thereafter. Minimum investment is 1 gram with a maximum limit of 4 kilograms for individuals, 4 kg for Hindu undivided family and 20 kg for trusts.

  • An investor can buy 4 kg of gold every year as the ceiling has been fixed on the basis of fiscal year (April to March).

  • The value of gold bonds is in Indian rupees; fixed on the simple average of closing price of gold of 999 purity published by the Indian bullion and jewelers association limited.

Taxation– The interest received on the sovereign gold bond is taxed according to the income tax act 1961. The interest earned during the financial year is clubbed with the investor’s annual income and taxed according to his applicable tax slab.

The sovereign gold bonds offer tax benefits that are not available on gold mutual funds and gold ETFs. If the bonds are held till maturity (8 years), they do not attract any capital gains tax.

In case of early redemption of sovereign gold bonds after the fifth year, the tax applicable would be LTCG at 20% with indexation benefits.

The risk associated with investing in sovereign gold bond

The risk associated with investing in a sovereign gold bond is the capital loss if the gold price declines, but the investor does not lose on the number of units he has paid and held for.

3) GOLD ETFs-

The gold ETFs (exchange-traded funds) aims to track the domestic physical gold price. It invests the investor’s money in gold bullion of 99.5 percent purity and gives the option to investors to invest in gold online.

The difference between a gold mutual fund and a gold ETF is that in a gold mutual fund you don’t need a Demat account to invest, while in a gold ETF you need a Demat account and a broker to buy and sell. Investors in gold mutual funds can invest through systematic investment plans (SIPs) which are not entertained in the ETFs, as the minimum amount of investing in ETF depends on the prevailing gold price.

The advantages of gold ETFs are-

  • It is easy to transact from any part of the country and can be done any time when the stock exchange is open. The liquidity is high.

  • Gold ETF is a safe option unlike physical gold as there is no fear of theft and storage expenses like keeping a locker.

  • To trade in an gold ETF the investor should invest at least in 1 unit which is equal to I gram of gold.

  • Gold ETFs provide diversification to your portfolio and you can maintain asset allocation thereby reducing overall volatility in the portfolio.

  • The gold ETF can be used as a collateral to borrow money in case you require it urgently.

  • The gold ETFs don’t have entry and exit load but since the brokerage or commission charges come to around 0.5 to 1 percent, look for a broker whose charges are low.

  • There are no making charges as compared to physical gold.

Taxation on Gold ETFs-

The taxation on gold ETF is similar to a debt fund. If the units are sold before 3 years and you make a profit, it is treated as capital gain and added to the annual income for taxation purposes. When the ETF units are sold after 3 years, the profit made on sale will be charged at 20% with indexation benefits.

4) Digital Gold-


There are many ways to invest in gold and one is digital gold. The digital revolution has not left the gold market untouched and people invest in the form of digital gold. Here the regular gold can be bought online and digital gold is a vault-stored 24K gold that can be assessed through digital channels. This is an option for customers who want dual benefits of investing in gold as well as the option to take delivery when required.

Benefits of Digital gold:-

  • It is convenient to purchase digital gold and it can be purchased from mobile wallets such as Paytm, Google Pay, PhonePe and UPI apps.

  • The bars and coins are certified by government agencies for the highest level of purity of 99.99% for 24K gold.

  • The physical gold has to be bought in multiples of 1 gram, while digital gold can to be bought in multiple of Re 1. There are high making charges involved in jewelry and for selling it a visit has to be made to a jeweler while the digital gold can be sold from anywhere and anytime. Liquidity is very good.

  • There is risk of theft in physical gold while the gold corresponding to each digital transaction is stored in a secured vault that is covered by insurance.

  • Investment in digital gold can be done even with a small amount according to the financial capability of a person.

  • Digital gold can be used as collateral for online loans.

  • Physical delivery of the gold can be taken at your doorstep.

Taxation-

In case of investment held for less than 36 months, the profit will come under short-term capital gain, under ‘income from other sources’, and taxed as per the tax slab of the buyer. If held for more than 36 months it will come under long-term capital gain(LTCG) and taxed at 20%( with indexation benefit) with surcharge and cess.

5) Gold Jewelry –

Through the past hundreds of years, people in India have been investing in gold jewelry. It is passed down through the generations due to its sentimental value and the jewelry is often beautiful and artistic. Due to their financial value, they make for a good investment as an asset class. For investment purposes, people should invest carefully and select pieces that would have the highest potential for resale. Physical gold comes in the form of gold jewelry, bar, or coins. Selling physical gold is never a problem unlike selling a property and there is ample liquidity. Gold prices have been consistent for ages and it has proven to be resistant to inflation thereby making it good for investment.

After the purchase of jewelry, a person should be aware of how to protect it. There is a storage problem and a person may have to buy a safe or keep it in a bank locker. There are incidents of chain snatching with people prone to danger to their lives. Even when a person keeps the jewelry in a locker he should insure it. When a person keeps jewelry in his house there should be photographs of the house lady wearing the jewelry for keeping records as proof.

The past two years have been very bad for the world due to the coronavirus pandemic. But due to increasing vaccination people are free to move now and can purchase gold at any of their favorite stores. For people who don’t want to invest in physical gold, there are other options like gold ETF, gold mutual fund, sovereign gold bonds, and digital gold. Gold is considered a hedge against inflation and over the longer time horizon it has delivered higher than inflation returns. Experts believe that around 10-15% of a person’s portfolio should be invested in gold. So it is a good time to invest in gold during this auspicious occasion of Diwali.

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