Gold as an investment and the benefits of investing in gold in India
Jun 17, 2020

Gold as an investment and the benefits of investing in gold in India

Since time immemorial, people demonstrate an affinity towards precious metals like gold, silver, and platinum. Among all these metals, gold as an investment has been in high demand among traders and influential people of the society. This metal enjoys a high liquidity value and has an innate inflation-beating capacity. You can opt for gold investment in India by purchasing coins, jewellery, sovereign gold bond schemes, bars, and gold exchange-traded funds. However, physical gold in the form of jewellery and coins have a risk of undergoing depreciation as the making charges, and the purity of the gold may experience changes over time. So, it is better to make gold investments as Gold ETFs (exchange-traded fund) and FoFs (Fund of Funds). If you have decided to invest in the metal, then go through our tutorial to know about the benefits of gold investment and the various forms in detail.

Why should you invest in gold?

There are several advantages of taking up gold as an investment. Let us have a look at them.

Remain Strong against Inflation

The equity market of India has shown occasional volatility and economic downturn. However, the prices of gold remained high even during these testing times. It acted as a hedge against inflation and insulated investors even during a reduction in the purchasing power of the currency of the country. Gold has also manifested strong market appreciation and has emerged as an investment choice for experienced and skilled traders.

Investment Diversification

If you are considering to diversify your investment portfolio, then look no further than Gold ETFs and FoFs. Market experts have certified and acclaimed gold investment returns thanks to its high liquidity value and inflation-beating efficiency.

Convenience in Trade

You can take up gold as an investment with a sum as low as Rs 500 per month as gold ETF SIP. Traders do not require to invest a lump sum amount in this portfolio during the initiation process. Over a few years, you can experience exponential growth in Gold ETFs and FoFs.

High Liquidity Value

Investors can subscribe and redeem their gold funds and bonds with just a few clicks of the mouse. You can enter or exit the market according to your choices. Even during the recession, gold has acted as a tangible asset.

Tax Benefits

The Income Tax department of India regards specific gold funds like the SBI Gold Fund as a non-equity product. Traders can claim long-term capital gain tax benefits if they remain invested in these funds for a prolonged period.

Unaffected Core Value in Recession

In History, the market has experienced an occasional fall of the gold price. However, it did not last for a prolonged period and demonstrated a strong rebound standing up to the test of times.

How to invest in gold?

There are multiple ways of investing in gold. You can either purchase the metal in the physical forms (jewellery, coins, and gold bars) or the paper forms (gold ETFs, gold mutual funds, gold FoFs, and sovereign gold bonds, SGBs). You can even invest in gold online. Let us have a look at the best ways to invest in gold.

1. Physical Gold

It is possible to purchase gold in the physical form as jewellery, coins, and savings schemes from the reputed jewellers in your city or e-commerce portals like Amazon India, Paytm and Snapdeal. Detailed below are the different forms of physical gold investments.

Jewellery

Indians have a long tradition of purchasing gold jewellery. However, in recent times, investment in gold jewellery has taken a hit due to high making charges, constant evolution in designs, and safety concerns. The making charges of many showrooms can reach as high as 25 per cent. If you decide to sell the ornaments, then this cost remains unrecoverable. Moreover, it is risky to buy and store gold jewellery in the house. Jewellery shoppers need to keep them in bank lockers, which is again subjected to yearly rent. These issues have made modern investors think twice before shopping for gold ornaments.

Gold Coins

Investors can also purchase gold coins of various denominations like 5 and 10 grams from banks, e-commerce websites, and jewellers. Gold bars are also available at 20 grams weightage. The Government of India has launched a new initiative of releasing gold coins with the Ashok Chakra engraved on one side and the photo of Mahatma Gandhi on the other. You can even consider them as physical gold investments as the making charge of coins is relatively lower than ornaments. It usually ranges between 8 to 16 per cent of the gold valuation. They come with 24 karat purity and 999 fineness, hallmarked as per the BIS standards. The presence of tamper-proof packaging assures buyers of the purity of gold.

2. Gold Savings Schemes

These days, many reputed jewellers have also launched gold savings schemes for customers. These unique policies allow investors to deposit a fixed amount of money monthly for a selected tenure. The shops also offer an attractive bonus at the end of the term, which is mostly a month's instalment. After the maturity of the scheme, customers can purchase gold equivalent to the deposited value along with the bonus amount. However, jewellers use the prevailing gold rate for the conversion of the amount into gold weightage.

3. Paper Gold

Paper golds are more attractive investment schemes, as there is minimal risk of storing them and no loss of money in making charges. Let us have a look at the different forms of paper gold investments.

Gold Exchange Traded Funds (ETF)

Gold ETFs is a cost-effective and transparent approach to owning paper gold. Here gold transactions take place through the stock markets like the NSE (National Stock exchange) and BSE (Bombay Stock Exchange). The primary advantage of this scheme is traders do not have to pledge a high initial amount for purchasing these ETFs. You may even start with the valuation of 1 gram of gold. Similar to all other transactions through stock exchanges, you require a Demat account to initiate these schemes. Traders get an option of either paying the entire investment amount at one go or select the SIP (systematic investment plan) approach. There are three charges associated with gold ETFs- expense ratio (for managing the schemes), broker cost (while buying and selling ETF units), and tracking errors (technically not a charge, but influence the ETF returns).

Gold Mutual Funds

Gold Mutual Funds is a variant of Gold ETFs. These are schemes that mainly invest in gold ETFs and other related assets. Gold Mutual Funds do not directly invest in physical gold but take the same position indirectly by Investing in Gold ETFs.

The difference between gold ETF and gold Mutual Fund is that like gold ETF, in gold mutual funds you don't need a demat account to invest. These funds are floated by the an AMC (Asset Management Company). Investors can invest in Gold Mutual Funds through the SIP route, which is not possible when investing in the ETF. The flipside of the convenience is the exit load that one has to pay, which is slightly higher than Gold ETFs.

Sovereign Gold Bonds (SGB)

Investors can also consider SGB (Sovereign Gold Bonds) issued by the Government of India. However, unlike other funds, these bonds are not available 'on-tap basis'. You need to wait for the window period when the Government will allocate the sale of SGBs. Usually, the window period arrives after every two to three months, and last for approximately a week.

4. Digital Gold

These days, there is also an option of purchasing 'Digital Gold' through 'GoldRush' schemes of mobile wallet platforms like Paytm or PhonePe or ‘Me-Gold’ offered by Motilal Oswal. These schemes are a JV (joint venture) between the public sector MMTC and Switzerland's PAMP SA. Like most other gold investment instruments, Digital Gold as an investment option is safe. Every gram of gold accumulated in your account is backed by actual physical gold. This means that at any given time in future, there will be no proportionate risk for you. But digital golds are more expensive than physical gold as the purchase price includes costs related to the transaction like maintaining the platform, processing payments, procuring and selling physical gold, insurance and storage up to five years

Now as you know how and why to invest in gold, some of the top gold funds that you can consider investing in are (as on 18th June,2020):

  • Axis Gold Fund
  • Aditya Birla Sun Life Gold Fund
  • Canara Robeco Gold Savings Fund
  • HDFC Gold Fund
  • ICICI Pru Regular Gold Savings Fund

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