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Gold Investment in India

The rich cultural history of India has seen gold as a part of common lives in the form of coins, jewellery and other items. It was also an integral part of the royal households as the precious metal has played an important role since many decades. This proves how deeply invested Indians are with the yellow metal.

Gold in India is an investment option of substantial importance because of the age old wisdom of collecting this precious metal being passed down through generations. It is one among the only investment options highly used by the womenfolk in India, irrespective of the financial background. Therefore, the demand for gold products, mostly jewellery, in this nation is one of the highest in the world.

Furthermore, gold investments in India are considered a safe option. The precious metal holds emotional, sentimental, and religious value as well. Despite the diverse cultural background and religious faiths, gold is used considerably in all traditional celebrations, devotional festivals, and in wedding ceremonies. Needless to say, it is collected dearly and passed down to newer generations as a token of love.

A Detailed Insight Into Gold Investments

Investments are an act of putting in money for further monetary gains and are chosen after carefully evaluating on the basis of different factors from the different investment options available in the market. The factors that one must look at before investing is the safety, the liquidity, and the returns from the investment instrument under the investment is being done.

Investments are classified into three basic categories. They are- ownership, lending, and cash equivalents.

Ownership investments:

  • It is the ownership of tangible/intangible asset
  • There is a high risk factor and also a high profitability quotient
  • Example: Real Estate, Stocks, precious metals etc.

Lending investments:

  • They have a low risk factor and low return of investment
  • They are a perfect choice for those unwilling to take huge risks but need an investment option.
  • Example: Bonds, bank accounts etc.

Cash Equivalents:

  • These investments are equivalents to cash
  • They have high liquidity and are ideal for short term investment
  • For example: short-term government bonds, marketable securities etc.

How to invest in Gold?

This is a commonly asked question about gold and has an answer with multiple choices that one can choose from. Initially, tangible gold items had to be purchased to be in possession of it as an asset. But with increasing technological comforts, it can now also be purchased as ETFs, sovereign gold bonds, gold mutual funds etc.

Mentioned below are the various gold investment options and their details:

Physical gold:

Paper gold:

  • Gold ETFs (Exchange Traded Funds)
  • Gold backed ETFs
  • E-gold
  • Gold Mutual funds / Bonds

Here is a brief analogy on paper gold investments-

What is Gold ETFs?

Let us first look at the meaning of ETF-Exchange Traded Funds. ETFs behave like individual stocks (but with high liquidity) and are traded in a similar fashion. Gold ETFs are an example for commodity assets with gold as the only chief asset. Investing in gold ETFs is not investing in actual, physical gold, but in the cash equivalents of the same. These investments are based on gold prices and help invest in gold bullions.

Gold ETFs holdings are transparent because they are based on direct gold pricing. Moreover, due to lesser additional charges, they are the closest to actual pricing of gold. These investments are done through stock exchange, either through National Stock Exchange or Bombay Stock Exchange with gold as the underlying asset.

Features and benefits of ETFs:

  • Major advantage of paper gold or Gold ETFs here is that its safety is better ensured. They have a lower risk of theft.
  • Small investments via SIP route instead of big amount investment can be availed. A minimum of 1 gram of gold investment can be made.
  • The gold acquired is in ‘demat’ form and hence, the purity of it doesn’t make much of a difference.
  • The direct prices ensure the transparency of ETFs obtained.
  • Gold ETFs help with the taxes too; if held for more than 3 years the capital you must have gained is subjected to 20% tax post indexation.

How to invest in them?

To invest in Gold ETFs, a trading account and a demat account has to be opened with a stock broker. You can choose to invest and buy in lump sum or not. The additional cost comprises of the expense ratio and broker cost. Expense ratio is charged to manage the funds (of around 1%), whereas broker cost is for the intermediaries- stock brokers.

What are Gold-Backed ETFs?

Gold backed ETFs are different from Gold ETFs on the basis of enjoying the benefits of owning physical gold (as the name suggests ETFs that are backed by physical gold). They facilitate access to ownership of physical gold along with its properties and security, without having to arrange for insurance and storage individually. They help track the price of gold and provide the flexibility of owning physical gold at the convenience of stock market trading.

Features and benefits of Gold-backed ETFs:

  • They are financial products that are regulated wherein a share corresponds to a specific amount of gold. The funds are entirely backed up by physical gold.
  • Gold backed ETFs require authorized stock brokers who exchange the shares for physical gold.
  • They combine the benefits of the sense of owning physical gold, but at the ease of stock exchange and have no responsibility whatsoever for the gold’s safety. This makes it a more attractive option than Gold ETFs.

How to obtain Gold-backed ETFs:

The way to invest in it is similar to that of Gold ETFs. Through a stock broker, investors can purchase Gold-backed ETFs like stocks through stock exchange. They can have these ETFs in possession in their custody account and sell them whenever they wish.

What is E-gold?

E-gold abbreviated for Electronic-gold, is an electronic way of buying gold. They are considered better than gold ETFs. They are cost effective as they have no recurring management cost. E-gold came into the picture long after ETFs had taken over the gold market.

However, in the recent times, E-gold has risen to the more preferred option.

Features and benefits of gold in electronic form:

  • Electronic gold is more preferred because it is high in return. The cost of trading E-gold is minimal as the NAV (Net Asset Value) is obtained after deducting the asset management fee, storage, and the custodian charges.
  • There is a cost reduction in the absence of recurring management fee. This, in the long run, becomes effective as the returns get positively affected by the reducing costs.
  • On the downside, E-gold attracts wealth tax and the minimum number of years for it to be considered long term is 3 years unlike Gold ETFs which is of 1 year.
  • Electronic gold can be converted into physical form and be delivered through physical delivery. But this facility is not offered by all institutions.

How to go about procuring E-gold:

E-gold can be obtained from National Spot Exchange Limited (NSEL) as they are in electronically demat form. NSEL provides investors the platform to purchase E-gold and convert them to physical gold, if necessary, or directly sell them for a profit.

Gold Mutual Funds as Gold investment option

Mutual funds are bought by pooling in money from many investors. This pooled money is used to purchase units or shares of the funds. A gold mutual fund is an investment in gold-bullion or gold producing companies. This is a convenient way to get returns from investments made on gold and at the same time, to avoid getting the capital affected from inflations or geo-political insecurities.

Features and benefits of gold mutual funds as an investment option:

  • One of the biggest advantages in comparison to aforementioned options is that a Gold Mutual fund does not require demat accounts.
  • The potential value of gold can be tapped into without the actual responsibilities of safekeeping physical gold.
  • Investment portfolios can be diversified through mutual funds. It can be started with a monthly investment of just Rs. 1000.
  • They are taxable as debt fund.
  • They are better protected comparatively from price fluctuations, political changes and inflations and therefore, are safer.
  • Gold mutual funds can be used as collateral for bank loans.

Under physical gold investments, investments on gold coins and bullions are notable. They are a better physical gold investment option than jewellery due to multiple factors.

Investments in gold coins and bullions

Gold coins and small gold bar account for among the highest ratio of gold demand in India as this form of physical gold can be easily resold. The prices vary between different parts of the world and the investment on physical gold comes with challenging responsibilities of safeguarding it.

Features and Benefits of gold coins and bullions:

  • Majority of the investors prefer investing on bullions than coins as they are available at a cheaper price.
  • At the same time, bullions have lesser saleability factor than gold coins. Also, reselling of gold coins can be easily done as they have multiple denominations unlike bullion. The denominations for 24k gold are 10 grams, 8 grams, and 5 grams.
  • Safeguarding small gold coins and bullions are easier than other physical gold items.
  • The price of premium bullion is subjected to market trend and bullions are considered a hedge against inflations.
  • They can be purchased from nationalised or private sector bank, online (there is no need for brokerage charge), a physical retailor etc.

How to Start Investing in Gold Online

Gold online is known as digital gold, to buy digital gold one can access mobile wallets such as Paytm, PhonePe etc., and under the Gold Rush Plan of Stock Holding Corporation of India. These facilities are made available in alliance with MMTC-PAMP, or SafeGold, or both. MMTC is owned by the government in a joint venture with PAMP, a company based in Switzerland. SafeGold has tie-ups with various digital wallet apps. This digital platform assists easy buying and selling, and receiving vaulted gold.

More about MMTC-PAMP:

  • It is free of storage cost
  • One can be in possession of the purchased gold for up to 5 years
  • To prevent the account from inactivating after 5 years, either convert this gold to coins or sell it

More about Safegold:

  • Storing charges are applied, depending on the amount of gold. 2 gram and more are free of storing charge for the first two years. Lesser denomination leverages a fee of 0.05% each month.
  • SafeGold uses PhonePe or Mobikwik for transactions.
  • The first point is applicable for payments through PhonePe, whereas using Mobikwik incurs fee and gives 7 year maximum storage. GST charges are also added to the standard processing charges for Mobikwik transactions.

Make sure to compare various features, charges etc. before deciding.

What are allocated gold accounts?

Allocated gold is gold owned by an investor under a safeguarding custody arrangement with a professional gold bullion vault. This is when an investor buys an amount of gold and allocates gold accounts for safekeeping. Unlike unallocated gold, allocated gold is not a property of the bank. Allocated account storage price is inexpensive because of the compact size of gold bullions. But it is advisable to look for institutions that provide commercial gold bullion storage unit which ensures cheaper allocation cost. This is because such institutions are not in financing or lending activities and have no motivation to charge higher than required.

How to buy gold biscuits in India?

One can buy gold biscuits with the help of these:

  • Card/Cash/Cheques:
    • A Jeweller outlet
    • Banks
  • Card/E-wallets (Paytm, Mobikwik, PhonePe)
    • Online Jewellery website
    • Amazon
    • Flipkart
    • Snapdeal etc.

To summarize, gold investment may not be an ideal investment because of its competent returns. However, gold investment has its perks too. There are many ways to invest in gold: physical, paper, and a combination of two. Each investment type has its own pros and cons.

Make sure to assess factors such as the investment time period, purpose (to increase gold investment portfolio etc.), budget, returns etc. before deciding. It is important to look for what suits your personal requirement and avoid following a certain investment trend.