Gold is known to be an asset with great financial value all over the world. In India, it’s a coveted asset with a unique emotional and social value attached to it. However, investing in gold is still in nascent stages. Specially the different options for buying the precious metal such as ETFs, Bonds, Schemes etc.
In this article, we show you the different options available in buying gold and how you can use this to add the yellow metal to your portfolio effectively.
Indians and the love for Gold
India has the 10th largest gold reserve under its belt.
As per the World Gold Council’s data, India has 672.9 tonnes of official holdings as of 2020. From jewelry to physical coins, bullions and gold bars, the demand for gold among Indians has made India the biggest importer of gold in the world. As per the data from Central Bank, the total assets under management(AUMs) for gold climbed to Rs.13,969 crore by the end of 2020. On top of that, 1st quarter of 2021 witnessed a 14 times greater inflow of Rs. 2,426 crore as compared to the same quarter last year.
But, what makes the tradition of gold investment so popular in India? Let us find out.
Benefits of investing in Gold
Investment has always been a risky road with unforeseeable ups and downs but not in the case of this precious yellow metal. Gold is considered to be one of the safest forms of investment with long term protection. It is one of the best ways to hedge against inflation.
Substitute Liquid Cash
Gold is acknowledged as an ideal substitute for liquid cash everywhere. It is widely accepted across the country as a liquid asset with easy cold cash conversions. For countries whose currency value is depreciating, gold acts as an alternative currency with a constant true value.
Most areas of India and abroad, when one is in need of urgent money, the first option is to pawn the gold they have or sell it if needed.
Minimal Inflation Risks
While monitoring inflation risks, what sets gold investment aside from all the other forms of investments like stocks, is its impressive history of astonishing performance with an unhindered change in its core value when the market sinks.
Value of cash depreciates year on year due to inflation. Prices of commodities increases. As such, with gold being a commodity, the price of it continues to increase.
Ever thought of selling a bike or mobile? You would only get about 40% to 50% of what you paid, even though it is just a few months old.
When it comes to reselling your investments in exchange for capital, gold gives you a better window of the selling price. Since the value of gold remains constant most of the time, second-hand gold price variance for this metal is better than the other resalable assets.
Maintenance and Management
Being a secure investment and the best of its kind, Gold has the cheapest maintenance cost. This is what makes this investment so economic and feasible to every demographic.
Numerous forms, shapes and modes
Gold is omnipresent and can be got in digital and physical forms.
- Gold Coin
- Gold Jewelry
- Gold bar
- Gold bullion
- Gold nugget
- Gold ETF
- Gold Bonds
- Gold Stocks (companies dealing in gold)
- Digital Gold coins and bars
- Gold certificates
Different types of Gold investments
It is clear by now that the Indian population covets gold, not just for financial stability but also for its traditional value. This makes the gold investment a prominent practice in India. With the above statements, it is evident that Gold Investment is more on the positive side when compared with other forms of capital investments. From an investment point of view there are many options to invest in:
Buying physical gold is the most popular method of gold investment in India.
Owning a physical form of gold like jewelry, bars, coins, etc., as an investment is considered safe and socially valuable. The first step towards investing in physical gold is to be clear about the format in which you want to buy it.
Gold jewelry looks pretty to the eyes but involves a high production(making) charge. From an investment point of view, physical gold in the form of gold coins or bars is considered to be a better option over accessories.
An investor in this case just has to make sure that they are buying the royal metal from a reliable source to ensure its safety and authenticity. The biggest challenge in investing in physical gold is the secure storage costs. Apart from that, there are no other additional costs that go into buying physical gold. Physical gold can be bought from various sources like banks or online stores that are issued by MMTC, NBFCs, etc.
Generally, these gold forms are present in their standard denominations- for coins the standard measurements are 1 gram, 5 grams and 10gm, while in the case of gold bars or gold biscuits it is 20gm and upwards with a 24 Karat. Purity and a hallmark of purity consented under BIS Standards in both cases for physical gold.
Gold Exchange Traded Fund is another way of gold investment. These are similar to mutual fund for gold. Buying gold ETFs signifies, buying gold in an electronic form.
And these gold ETFs can be bought and sold in an open market just like trading a stock of a company. Many investors have gradually shifted to investing in gold ETF due to better security and improved trackability.
Buying gold in digitized format also eliminates the possible need for storage costs. The units of gold are listed on the stock exchange for the investors with a Demat account and trading account to buy. Pertaining to a different structure and production, these gold ETFs are considered greatly economical when compared to physical gold investments.
With the elimination of frictions caused by the physical gold investments, like, making charges, storing charges, or jeweler margin, this option is widely accepted by the Indian audience. ETFs are known to be completely transparent which makes this a trustworthy form of gold investment. The trading of gold ETF is strictly regulated by the Government of India through the Security and Exchange Board of India (SEBI), which ensures that the investors get the best price for their investments. As such, Gold investing via ETF has little to no chances of fraud.
This is a convenient and cost-effective way of purchasing gold through online platforms. Here one can buy and sell gold for as low as Rs 10, and acquire gold of 99.9% purity at any time, pertaining to the current market price.
The digital gold purchased is stored in secure vaults and is insured making the investors develop a sense of trust against the investment. When someone makes a purchase for digital gold from an online platform, that company stores that equivalent amount of that gold in its vaults. Now, the investor can either buy this gold by paying delivery charges or sell it back to the company in exchange for liquid cash.
Sovereign Gold Bonds
Another form of gold investment is Sovereign Gold Bonds. As per Government of India guidelines and regulations, SGBs are government certified securities denominated in grams of gold.
SGBs act as a substitute for physical gold, and the investors have to pay the price in cash to buy it, and the bonds will be redeemed in cash when it matures. The bonds are issued by the Reserve Bank of India (RBI). As per the RBI guidelines, “The quantity of gold that the investors pay for stays protected since they receive the ongoing market price at the time of redemption/ premature redemption.”
The appreciation of Gold’s value while under this scheme is tax free. Eg: If the price of gold was Rs.4950 when you bought the SGB and 8 years later when it matures the price of gold then is Rs.8900, you need not pay tax on the increased price and profits due to that.
Not just that, to incentivize buyers, RBI usually gives a Rs.50 discount to online buyers who subscribe to a SGB issue.
Gold linked stocks
If you do not want gold and are comfortable with stocks, yet wish to have an investment linked to gold, this is for you. There are a number of companies that are involved in the gold ecosystem. There are gold miners who mine gold, then processors and distributors etc.
You can consider investing in the stocks of these companies. As the value and demand of gold increases the income of these companies too rises, increasing your investment.
If you are an active trader you can consider gold futures in your trade strategy. Gold is a commodity similar to silver and sugar. As such the demand and price fluctuates and is actively traded with futures contract and options indexes.
Indian Gold Monetization Scheme
Indian households own a great percentage of gold, close to 25,000 tonnes which is worth around Rs.110 lakh crore. And that’s just the gold present in the houses of the Indians.
The government of India launched the Gold Monetization Scheme in 2015, intending to transform the physical gold present in the Indian households into a high yielding asset. This scheme’s motive was to reduce India’s dependence on gold imports. This monetization scheme works in a similar fashion as a term deposit.
Just as how the deposits are made with a bank to earn interest for a fixed period of time, in this scheme, gold present in any physical form like jewelry, bars, or coins, is deposited in a bank for a fixed amount of time and earns interest on the deposited gold. The interest, in this case, is mitigated according to the weight of gold deposited.
Disadvantages of investing in Gold
There are a few shortcomings when holding gold for investment purposes. You will notice that most of these are issues with owning physical gold and will not be a problem if you choose to have gold in digital form instead.
Limited earning potential
Unlike stocks investments made in Gold, Silver etc do not appreciate quickly. On the other hand, unlike fixed deposits you cannot expect a steady flow of income.
Depending on Inflation, demand etc value of the yellow metal may go up or down. But historically, gold investments have performed a lot better than FDs, and a lot more consistently than stocks.
Gold, especially in it’s physical form can be easily stolen. This is one of the biggest concerns for those holding gold coins or jewelry.
Another problem with having actual gold is that it can be subject to adulteration and it is difficult for you to figure out without the help of an expert. It is quite common to mix gold with bronze or silver to make it less malleable and stronger.
There have been known forgeries and fakes where the mix ratio is higher or even gold ornaments inlaid with metal to increase it’s weight.
Of course, you will also need to own a locker in a bank, or fortify your house if you plan to hold onto large amount of solid gold. Bank lockers can cost you anywhere between Rs.2500 to Rs.30,000 depending on the size of the locker, bank, branch location, city etc.
Adding Gold to your investment portfolio
First step is to figure out what percentage of your portfolio will be invested in gold. It is important to maintain a diversified investment strategy. Here is why.
Diversification in portfolio
Ever heard of the saying that you should not “put all your eggs in one basket”?
If you were to invest heavily in Stocks and if there is a market crash you may suffer badly. On the other hand if you keep all your money as hard cash for a long time or in Fixed Deposits, then the value of the money erodes due to inflation.
Gold is an excellent asset class to maintain a diversified portfolio and hedge against inflation. Rise or fall in the stock market does not affect gold much. Similarly rise in inflation actually causes a rise in the value of gold too, hence providing a counterbalance to the value you lost on FDs and cash equivalent investments.
Which form of gold is right for you?
Once you have decided how much to buy in gold, now choose between the various options available.
Saving up for marriage
In India, one of the largest requirement for gold is for marriages. So if you are saving up for that, then it is better to consider physical gold.
You can look at buying bullion or ornaments directly. There are some great savings scheme offered by leading jewelers such as Tanishq that allow you to save a small amount monthly and buy a large ornament later on.
Hedging against inflation and diversification
If your need to buy gold is to safeguard your investments against inflation and keep a diversified investment portfolio, then consider digital gold.
You can buy gold from digital vendors such as Amazon, Paytm or banks such as ICICI and HDFC. They issue a gold certificate proving your gold ownership and it’s purity (usually 99.9% pure gold). You can sell this back to them when you need to cash out or request for physical gold coins.
Digitally too gold acts as a great inflation hedge and in fact you save a lot in terms of zero wastage etc.
Some questions on investing in gold in India
Investing in gold means buying a physical or digital form of gold as part of your investment portfolio. This is purely as a savings and with the expectations of the value of gold appreciating and giving you returns on the money invested.
Depending on your age, you can consider investing 20% to 50% of your portfolio in gold. The closer you are to 100 years old, the more the percentage you should invest in gold. This is because it is a lot less volatile and can be converted to cash quickly when in need.
You can’t buy shares in gold. You can buy Gold ETFs that are similar to digital gold. Or you can buy shares of companies that deal in gold or gold production.
Yes, the earlier you invest in gold the better. Gold has been steadily increasing in value and will keep doing so due to inflation.
Yes, Warren Buffet is a big fan of investing in Gold and Silver due to their stable and anti-inflation nature. Anyone who bought Rs.1,00,000 worth of gold 50 years back will have Rs.2.5 Crores worth of gold today.