Why investing in gold in India is a good idea

Gold, a yellow shiny metal is a symbol of prosperity and wealth. In India, ancient gold idols in many temples make us realize the significance gold holds in the country. for ages. Gold has also played an important role in the economy of many countries and also in the international monetary system. Gold was circulated as currency before the paper money was introduced. Though, it’s not used as a currency now, it still holds an eternal value. Its indestructible value is what makes a gold a good investment option for preserving wealth.

Benefits of investing in gold

Gold as a commodity and an asset class holds its significant place in the world of investing. Let’s take a look at the benefits of gold as an investment.

  • Hedge against inflation: When inflation rises, gold also rises in value. Gold is traded everywhere in the world. Hence, gold is priced in global currency, US Dollars. Any dip in the dollar price will lead to rise consumption of gold. Hence, during the time of inflation, gold holds much more value than currency or cash. This is the reason why gold is preferred by many investors as a hedge against inflation.
  • Liquidity: Gold being the universally traded commodity, it can easily be converted into cash anywhere around the world. There are many gold investment options like gold exchange traded funds and gold futures, which are traded on the exchange, and offer high level of liquidity.
  • Flexibility: There are various gold investments that offer you flexibility. For example, e-gold can anytime be converted to physical gold. Gold coins and bars be sold back or can be used for making ornaments and jewelleries.
  • Ever lasting value: Gold has always retained its value even from ancient days. Gold is unique and desired by everyone. Being a scarce metal, gold will always remain as most valuable metal. Gold never loses its value as a whole, as the rate does not change. Change in price is only in comparison to its quantity.
  • Universal commodity: Gold is the desire of everyone everywhere. Though, it’s not the currency in circulation, but it’s still a most valued universal commodity.
  • Diversification: Portfolio advisors keep advising investors on diversification which means investing in various asset classes like equity, debts and real estate etc. The idea of diversification is to reduce the overall portfolio risk by investing in assets that are not directly correlated. As gold usually moves inversely to the currency values and stock market, it is considered for diversification. Basically, gold has low correlation with all the other asset classes including equity, a part of money invested in gold investment options can diversify your portfolio. Also, gold is used as an input in many production processes. Apart from jewellery making, gold is used in various industries like electronics and healthcare etc. Thus, the precious metal is always bound to stay in demand. With the variety of gold investment options available in India today, investors can choose the most suitable option to go with. Though gold investments cannot fetch you as high a return as equity market can over the long-term, it can definitely provide you with principal protection. Gold is a low-risk investment that can help conservative investors by giving them a feel of safety. Similarly, aggressive investors who are more into equity investments could also enjoy the benefit of diversification by investing in gold.

Conclusion

To sum it up, gold can be an important part of a diversified portfolio as it never loses its value. Specifically, gold investment can be considered as protection element for a portfolio against inflation, currency devaluation and other economic uncertainties. So, you must explore all the gold investment options available and invest wisely.

Frequently Asked Questions On Gold Investment in India

Is gold a good long-term investment option?

Over the long-run, gold may not give you extraordinary return. But, it’s still worthwhile to invest in gold for long-term for many reasons. Here are few of the reasons

  • Being a safe haven investment, it balances portfolio
  • It offers liquidity
  • There are various tax advantages of investing in many gold investment options
  • It provides protection against currency disruption, devaluation or inflation.

Basically, gold investments can be profitable when all other investments fail.

When to invest in gold to make it a profitable investment?

Gold is definitely an attractive investment option owing to its ever-lasting value. Unlike equity investments, which are high risk, high return investments, gold is relatively safer. Hence, gold investments usually fetch moderate returns. Considering gold as a protection against various things, investors can time their entries to gold market in below scenarios to get the maximum possible return.

  • When the inflation tends to rise: Most of the investment perform poorly when inflation is high. Inflation can eat away the value of investments as it drives up the prices in the economy. Gold is one such investment that has inflation-beating capacity. With the price hike in economy, gold prices tend to rise. Hence, it’s wise to invest in gold when price rise trend begins.
  • When the currency value starts dropping: change in the value of currency is reflected in gold prices. As gold price has an inverse relation with currency value, it’s advisable to start investing in gold when you expect a fall in currency value.
  • Global geopolitical uncertainties: Global geopolitical tensions is one of the important factor to affect the gold price movement. The simple reason for this is people tend to rely more on real assets like gold in the time of crisis. Hence Gold is considered as crisis commodity that performs well during economic uncertainties caused by geopolitical tensions.

What are the useful tips for investing in gold?

Buying gold in physical form, which is buying gold jewelleries, ornaments, gold coins and gold bars is a conventional method of investing in gold for the purpose of preserving wealth. However, there are plenty of other advanced forms of gold investment options that are available today. Gold exchange traded funds, e-gold and sovereign gold bond etc. are the current choices available for investors. With the availability of this advanced gold investment options, investors can participate in gold market without even taking the delivery of actual gold. There is no risk of theft and burglary associated with storage of physical gold. Here are a few useful tips for investing in gold:

  • Firstly, decide the amount that you would like to allocate for gold investments. Many experts advice is to keep the gold investments within the limit of 20% of overall portfolio.
  • Use gold as a diversifier to your portfolio.
  • If you are investing in physical gold, ensure to check on price and purity. Price varies from city to city. Consider buying it from certified and reputed dealers.
  • For cost-efficiency, transparency, flexibility and liquidity, consider indirect gold investments like gold exchange traded funds. This investment is backed by strong professional guidance.
  • For long-term, safety and tax-efficient options, consider investing in sovereign gold bonds that are backed by government of India. There is a sovereign guarantee on the interest and principal amount invested.
  • Consider to invest in gold funds that invests your money in gold mining companies. Take help of your financial advisor to select the right fund that invests in gold mining companies.

What is the tax-efficiency of gold investments?

For investors, investment in any form of gold is subjected to income tax under the Income Tax Act, 1961. Physical gold, gold jewelleries, gold coins, gold bars, e-gold and gold exchange traded funds are all subjected to capital gain tax when the profit is made out of selling. Here are the details of tax treatment on physical gold and gold ETF investments.

  • Short-term capital gain on gold: Any gold investment sold within three years of purchase, the net proceeds from such investment is subjected to short-term capital gain tax. Rate of tax is applied as per the tax slab applicable to the assesse. There is no exemption available.
  • Long-term capital gain on gold: Any gold investment sold after three years of purchase, profit from sale of such gold investments are subjected to long-term capital gain tax. The tax rate applicable is 20% with indexation benefits and 10% without indexation benefits. Proceeds can be exempted from tax, in case the net proceeds are invested in residential property as per Section 54F or in bonds as per Section 54EC of the Income Tax Act, 1961.

Tax treatment on Sovereign Gold Bonds

  • The profits arising out of sovereign gold bond redemptions are not taxable. The capital gain tax on redemption of sovereign gold bonds are exempted for individual investors.
  • Interest paid on the bonds are taxable as per the provisions of the Income Tax Act, 1961.
  • In case of transfer of bonds, indexation benefits will be provided on long-term capital gains. Any gold investments are not subjected to wealth tax.
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