A Comprehensive Guide on Investment in Gold
Gold Investment- How to Invest, What Option Available and their benefits
From the time of ancient
civilization to the modern era, gold has been the world’s currency of choice.
Today, investor buy gold mainly as a hedge against political unrest and
inflation. In addition, it is also a safest and traditional investment option
for Indian society. Also, many Investment advisor recommend a portfolio
allocation in commodities, including Gold, in order to lower overall portfolio
risk.
In this article we will
discuss different option by which we invest an amount in Gold and also their
benefit and drawback.
Why You Should
Invest in Gold
a. Investing in gold is worthwhile because it is
an inflation-beating investment. Over time, the return on gold investment has
been in line with the rate of inflation.
b. Gold has an inverse relation with equity
investments. For example, if the equity markets start going down, gold would
perform well. Considering gold as an investment option in your investment
portfolio will be a buffer to the overall volatility of your portfolio.
·
Physical
Gold
·
Digital
Gold
·
Severing
Gold Bond
·
Gold
ETFs (Exchange Traded Fund)
·
Gold
Mutual Fund
Physical Gold
Investment in physical gold is the most traditional way of investment in
Indian Society. On the occasion of marriage Indians buy gold jewellery,
ornaments, coins etc. Where they will pay making charges, GST element etc and
get 23 Karats Gold items commonly.23 Karats refers to the gold’s level of
purity, and its mean your item is 23k out of 24k. It’s composed of 95.8% gold
and 4.2% alloy. But it’s a traditional practice which we all have seen usually.
Gold in bulk form is referred to as bullion,
and it can be cast into bars or minted into coins. Gold bullion’s value is
based on its mass and purity rather than by monetary face value.Even if a gold coin is issued with a
monetary face value, its market value is tied to the value of its fine gold
content.
Investors can buy physical gold from government mints,
private mints, precious metal dealers, and jewellers. Because different sellers
may offer the exact same item at different prices, it is important to do your
research to find the best deal. When you purchase physical gold, you must pay
the full price.
Physical gold ownership involves a number of costs, including storage
and insurance costs, and the transaction fees and markups associated
with buying and selling the commodity. There can also be processing fees and
small lot fees for investors making small purchases. While collectively these
costs may not significantly affect someone looking to invest a small portion of their portfolio in gold,
the costs may become prohibitive for investors seeking to gain larger exposure.
Pros:
·
It's relatively easy to buy and
sell coins.
·
Investors have the ability to test
the gold content of the coin when they buy gold coins.
·
Owning and possessing gold can be
very satisfying.
·
There's a significant potential
upside for gold.
Cons:
·
Dealers charge premium prices and
fees for gold coins.
·
Gold has large liquidation
spreads.
·
It can be challenging to verify
old or rare gold coins.
·
Storing and insuring gold coins
and bullion can be a hassle...and expensive.
·
It's not clear how much price
appreciation potential gold might have.
·
It’s also not provided regular
income apart from appreciation like other Gold Option such as Severing Gold
Bond
Digital Gold
Despite being in the midst of a global pandemic, Indians have found a
new way to invest in the yellow metal – Digital Gold.
As people are hesitant to visit jewellery stores and gold dealers, being
able to procure gold online has come as a perfect solution to many investors.
One Digital Gold trader, Augment Gold Ltd. saw its businesses increase by
40-50% during the lockdown period.
So, before we dive into what Digital Gold is, let’s do a quick rundown
of how we have been investing in gold over the years:
Ways to Invest in Gold?
Well historically the most common way to invest in Gold has been to buy physical gold in the form of:
·
Coins
·
Bullion and
·
Jewellery
Apart from that, we have Sovereign Gold Bonds, Gold Mutual Funds and
Gold ETFs to choose from.
But during a pandemic, another method of investing in Gold that has been
gaining immense popularity is in the form of Digital Gold.
What is
Digital Gold?
Buying physical gold certainly has its downsides. There are issues of
identifying its legitimacy and purity, then there are problems of safekeeping
and storage. One more issue is that we are in the midst of a pandemic. It is
not quite ideal to go out to gold dealers or jewellery stores.
Digital gold, on the other hand, can be bought online and is stored in
insured vaults by the seller on behalf of the customer. It also helps us
overcome all the aforementioned issues of physical gold purchases. All you
require is Internet/mobile banking and you can invest in gold digitally
anytime, anywhere.
How digital
gold works?
You can invest in digital gold from several mobile e-wallets such as
Paytm, Google Pay and
PhonePe. Brokers such as HDFC Securities and Motilal Oswal also have an option
for digital gold investing.
Currently, there are three companies that offer digital gold in India-
1. Augmont Gold Ltd.
2. MMTC-PAMP India Pvt. Ltd. a joint venture between state-run MMTC Ltd. and Swiss firm
MKS PAMP.
3. Digital Gold India Pvt/ Ltd with its SafeGold brand.
Apps and websites like Paytm, G-Pay etc only provide a platform for
metal trading companies SafeGold and MMTC PAMP. Once you invest in digital
gold, these trading companies purchase an equivalent amount of physical gold
and store it under your name in secured vaults.
But this process is actually as easy and convenient as it sounds? Let’s
take a look at how you can invest in Digital Gold
How to
trade in digital gold?
First, you visit any of the platforms which offer digital gold
investments such as Grow, Paytm, HDFC Securities, G-Pay, Motilal Oswal etc.
Once you are on their platform, you perform the following steps:
1. Enter an amount in INR or grams – You can buy gold of a fixed worth,
or buy by weight at the live market rate.
2. Choose your payment method – Once you complete the KYC process, you
will have multiple payment options to choose from such as an account, card, or
wallet.
3. Store your gold in a secured locker – Your account is updated
instantly, and can be accessed 24/7.
4. Sell whenever you want – You can choose to sell your gold digitally
itself to the platform whenever you want.
5. Take physical delivery of the gold – Incase you chose to not sell the
gold, you can request for a doorstep delivery of your gold in the form of coins
or bullion. Note: Delivery fees are applicable.
Benefits of Investing in Digital Gold:
·
You can take physical delivery of
the gold at your doorstep.
·
You can invest an amount as low as
Re.1.
·
Digital Gold can be used as
collateral for online loans.
·
Digital Gold is genuine and the
purity is 24K 99.5% for Safe Gold and 999.9 in case of MMTC PAMP purchases.
·
Your purchase is stored safely and
is also 100% insured.
·
You can exchange digital gold for
physical jewellery or gold coins and bullion.
Disadvantages of Investing in Digital Gold:
·
Limit of Rs.2 lakhs for investment
on most platforms.
·
Lack of an official government-run
regulating body such as RBI or SEBI.
·
Delivery and making charges are
further applied to the price of gold.
·
In some cases, companies only
offer a limited storage period, after which you either have to take physical
delivery or sell the gold.
Sovereign Gold Bond
The government issues such bonds in tranches at a fixed price that
investors can buy through banks, post offices and also in the secondary markets
through the stock exchange platform.
These bonds are backed by a sovereign guarantee and can also be held in
demat form. They are priced as per the underlying spot gold prices. These bonds
offer an interest at the rate of 2.5% per annum on the principal investment
amount.
While the interest on the bonds are taxable, the capital gains
at the time of redemption are exempt from tax
These bonds can also be used as collateral for availing loans from
banks and NBFCs.
It has a fixed tenure of eight years, though early redemption
is allowed after the fifth year from issuance.
The bonds are listed on the exchange, these can be transferred to other
investors as well.
The bonds are priced in rupees based on the simple average of closing
price of gold of 999 purity, published by the India Bullion and Jewellers
Association
At the time of redemption, cash equivalent to the number of units
multiplied by the then prevailing price would be credited to the bank account
of the investor.
Capital loss is a risk since the bond prices would reflect any change in
gold prices. If gold prices fall, the principal investment would fall
proportionately.
There may be a risk of capital loss if the market price of gold
declines. However, the investor does not lose in terms of the units of
gold which he has paid for.
Joint holding is also allowed in SGB investment.
The value of the bonds is assessed in multiples of gram(s) of gold,
wherein the basic unit is 1 gram. The minimum initial investment is 1 gram of
gold, and the upper limit is 4 Kg of gold per investor (individual and HUF).
For entities such as trusts and universities, 20 Kg of gold is permissible
Benefits of subscribing to SGBs include the attractive interest rate
with asset appreciation opportunity, the redemption linked to the price of the
precious metal, the elimination of risk and cost of storage, the exemption from
capital gains tax if held till maturity, and a hassle-free holding as it
eliminates the storage cost of physical gold.
Gold ETF
Gold ETFs are ideal for those who choose to use gold as an
investment option rather than for personal use. Gold ETFs can be used as a
buffer against any form of uncertainty. It aids in asset diversification and
ensures that your portfolio is well-balanced; as gold prices fall or rise, you
can adjust your asset allocation plan to ensure that risk is minimized and
gains are sustained.
From the time of ancient
civilization to the modern era, gold has been the world’s currency of choice.
Today, investor buy gold mainly as a hedge against political unrest and
inflation. In addition, it is also a safest and traditional investment option
for Indian society. Also, many Investment advisor recommend a portfolio
allocation in commodities, including Gold, in order to lower overall portfolio
risk.
In this article we will
discuss different option by which we invest an amount in Gold and also their
benefit and drawback.
Key Benefits of Gold ETFs
DIVERSIFICATION
Investing in gold ETFs helps an investor to diversify and spread his investments in a safer investment class.
SAFE & SECURE
Buy or sell gold ETFs easily and safely and store gold ETF in demat account unlike physical Gold
EASY LIQUIDITY
Trade in gold ETFs directly on the stock exchanges, and buy or sell gold ETFs at any given point of time
HEDGE AGAINST INFLATION
Safeguard yourself from inflation and currency fluctuation by
investing in best gold ETFs in India.
Gold Mutual Fund
Gold Mutual Funds are gold funds that invest in gold exchange-traded funds (ETFs). Gold funds invest in gold bullion and depend on instruments that are directly linked to gold prices.
Gold mutual funds, like any other mutual fund, earn returns
based on the performance of their underlying investment. The NAV of gold funds
changes in this situation as the price of the gold ETFs in which they have
invested changes.
You will be investing in gold at the current rate if you
purchase a gold fund. You will be selling gold at the current rate when you
redeem. You've made money on gold if the price of gold at the time of
redemption is higher than the price at the time of investment.
Difference Between Gold Mutual Funds VS Gold ETF
Minimum Amount
Gold Mutual Funds require a minimum investment of INR 1,000 (as a monthly SIP), while Gold ETFs usually require a minimum investment of 1 gram gold, which is close to INR 4800 at current rates.
Investment Mode
SIP-based gold funds are available, while gold ETFs are not. Without a Demat account, Gold mutual funds may be purchased from mutual funds; however, Gold ETFs are traded on the exchanges and need a Demat account.
Transaction Cost
The management costs of Gold ETFs are lower than the Gold Mutual Funds. Gold MFs investing in Gold ETFs also have Gold ETF costs.
Transferability
Whenever required, one can convert ETF to metal while gold MF stays on a Demat account, like any other equity.
Liquidity
In contrast to gold funds, ETFs have no exit loads, which ensures that investment companies can buy or sell the units during the market hours at any time. The sale to the fund house on the NAV of Units of Gold Funds can be redeemed by day.
Taxation
If you invest in gold by mutual funds or exchange-traded funds, the long-term capital gains tax rate would be 20% plus a 4% cess. Short-term investors (those with a holding period of fewer than 36 months) would not be subject to direct taxation on their profits. Instead, those earnings are applied to their other earnings, and taxes are levied according to the relevant slabs.
|
Features |
Gold MF |
Gold ETF |
|
Investment Amount |
Minimum investment Rs 1,000 |
Minimum investment is 1 gram of gold. |
|
Account |
Demat account is not required |
Demat account is required |
|
Investment |
Invests in pure gold of 99.5% purity |
Invests in gold ETFs |
|
SIP |
SIP route of investment |
No SIP route |
|
Liquidity |
Compared to gold ETFs, they are less liquid. |
Offer higher liquidity |
|
Conversion |
No facility to convert into physical gold |
Gold ETFs can be converted to physical gold |
|
Charges |
If units are redeemed before one year, gold
mutual funds charge an exit load. |
Gold ETFs charge no exit loads |
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