Hello fellow investors,
We Indians love our gold.
And it also works as a good financial backing. In fact, it is the fallback asset in India to tide over financial emergencies. In the calendar year 2020, gold has given an exceptional return of over 41%, the highest returns generated in the last decade. While that is attractive, gold has given an average return of 9% per annum for the last 30 years.
Gold is on everyone's mind so we thought let us highlight the ways in which you can invest in gold. Though in no way are we recommending you go and buy it without checking if it fits in your portfolio.
Gold can be owned as physical gold and as paper gold.
You can buy it physically in the form of jewelry, coins, and gold bars. Gold can be owned digitally through Gold ETF, Gold Mutual Funds, Sovereign Gold Bonds (SGBs), and as Digital Gold through wallets. We have discussed each of them in detail here.
1. Buying Jewelry: For buying jewelry you reach out to your neighborhood jeweler or your family jeweler uncle or can buy it online today. Such jewelry generally forms a part of your personal assets against your investment assets.
As an investment, there are some concerns with gold jewelry like safety, purity, and its high cost (such as making charges). Jewelry making charges range from 6% to 10% of the cost of the gold and are a cost for you the day you purchase jewelry and hence not a preferred mode of investment.
To ensure its authenticity, you must check The Bureau of Indian Standards (BIS) hallmark, the Jewelers' identification mark, and the purity of gold stamp on the jewelry that you are buying to ensure its authenticity.
2. Gold Savings Scheme - Given the high prices of gold, (₹ 55,000 per 10 grams for 24kt purity gold as of 5 August 2020), many jewelers run gold savings schemes to make it easy for buyers to buy gold by paying in installments.
A typical gold scheme allows you to deposit a fixed amount every month for the chosen tenure. When the term ends, you can buy gold (from the same jeweler) at a value that is equivalent to the total money deposited, including a bonus amount added by the jeweler to incentivize the depositor. In most cases, the jeweler adds a month's installment for every 11 installments deposited or may offer a gift item.
Please note that this scheme is useful only when you want to buy gold jewelry from the jeweler (say Tanishq or Kalya Jewelers or your local jeweler) whom you are depositing the installment each month. Don't forget that jewelry making charges would still be payable by you when you buy the jewelry.
3. Gold Coins: If still want to own physical gold and do not want to lose out on the making charges, then Gold Coins is a good option. You can buy them from jewelers, banks, non-banking finance companies, and even some e-commerce websites.
The government has launched ingeniously minted coins that will have the National Emblem of Ashok Chakra engraved on one side and Mahatma Gandhi on the other. The coins are available in denominations of 5 and 10 grams while the bars are for 20 grams.
Paper Gold or Gold Securities
Physical gold has its advantages and most of us own gold like that. However, PAPER GOLD is the new seamless way of investing in gold. It is effortless to buy and does not carry the security risk and purity risk of physical gold. Let's look at options to invest in Paper Gold.
1. Gold Exchange Traded Fund (ETF) - Gold ETF is the most cost-effective way of owning gold. The Gold ETF can be purchased via the stock exchange (NSE or BSE) which has gold as the underlying asset. Transparency in pricing is another advantage.
To Invest in ETFs you need to have a Trading and a Demat account which is the same one used for owning stocks.
When choosing an ETF, compare the Fund Management charges and the Tracking Error of the ETF with other ETFs and choose the one with the lowest Fund Management charges (expenses for managing the ETF for you) and lowest Tracking error (deviation from gold prices). This ensures you get the return on your gold investment with the least deviation from the actual gold prices.
2. Gold Mutual Funds: If you don't have a Trading and Demat account, you can invest in Gold Mutual Funds which in turn invest the Gold ETFs discussed above. Just like Gold ETFs, choose the Gold Mutual Fund with the lowest Fund Management Expenses and Tracking Error.
While Gold Mutual Funds allow you to own gold without having a trading and demat account, you land up paying Fund Management charges twice, to the Mutual Fund as well as to the Gold ETF.
3. Digital Gold: You can buy gold online via mobile wallets such as Paytm, PhonePe, Google Pay and under the Gold Rush Plan of Stock Holding Corporation of India. All these gold buying options are offered either in association with MMTC-PAMP or SafeGold or both.
This is a good option to invest in gold in smaller quantities of as little as INR 1 grams of gold. However, you can keep the gold with them for 5 years, after that you must either sell the gold or convert it into gold coins. To know more about digital gold, read here.
Be sure you understand the charges associated with liquidating the amount you accumulate when investing in gold via this option.
3. Sovereign Gold Bond - If you don't mind a lock-in of 8 years for your investment, the best way to invest in gold is via the Sovereign Gold Bonds (SGBs) issued by the Government of India.
The returns on gold via this mode are tax-free investments as no tax is levied on capital gains on the maturity of these Bonds. Further, you also earn a simple interest of 2.5% per annum on the gold bonds in addition to the increase in gold prices. If you are looking to invest your money in Gold for value appreciation and bringing a balance to your portfolio then SGB's are a good investment option. You can read more about it here.
SGBs are not available 'on-tap basis'. Instead, the government intermittently opens a window for the fresh sale of SGBs to investors. This could typically happen every 2-3 months and the window remains open for about a week. If you are looking to purchase SGBs anytime in between, you can buy them from the secondary market as the SGBs are listed on the Stock Exchange.
You have quite a few options to buy Gold. Now, which option should you opt for would depend upon the need of buying gold? If you want to buy gold to wear as a jewelry or gift for wedding functions then physical gold is the way to go for. However, if you are looking to invest in Gold then depending on the time period you have in hand - for short term needs (like 3 - 4 years), you can invest in Gold ETFs or Gold Mutual Funds, for long term needs (of 5 to 8 years), you can opt for SGBs.
Avoid going overboard with gold investments given the good returns of the recent past and stick to your Asset allocation.
Disclaimer: - The articles are for information purposes only. Information presented is general information that does not take into account your individual circumstances, financial situation, or needs, nor does it present a personalized recommendation to you. You must consult a financial advisor who understands your specific circumstances and situation before taking an investment decision.