Gold Investing – Different Options to invest in Gold in India
Gold is the favorite asset class of Indians. Though there are different options to invest in gold in India, we have typically stuck to jewellery as the primary option. Did you know Indian households have nearly 16,500 tonnes of gold worth Rs.30 lakh crores? The purpose of this post is to showcase the other forms of investing in gold.
Gold has always caught everyone’s fancy. It’s one of the few asset classes that is universally popular. It is not surprising to hear that an Individual’s asset class is primarily comprised of gold before marriage and it remains a major part even after that.
Gold has given stellar returns in the last 6 years with more than 24% compounded returns from 2006-2013. Not to miss the fact that Gold is bought for dowry and marriage purpose which Indians consider the most important occasion of their life. But if you’re a shrewd investor, it is beneficial to know the other options of invest in gold. This way, you can choose what is suitable for you.
Why should you invest in Gold?
Gold is a favorite among investors as long term investment option not without reasons. The advantages with investing in gold are as follows:
- Diversification – Gold is negatively correlated to equity. You would have noted that Gold has started stalling/falling after January 2014 when markets start to go up. It is because of this negative correlation. Investors park their money in gold when stock markets are unpredictable to be on safer side. When stocks markets are expected to go up, they sell gold and buy stocks/realty with that money. So returns from gold are often positive when economy/market is down and vice-versa. It is important in asset allocation. But make sure it does not go above 10-12% of your overall assets.
- Hedge against inflation – Your parents saving gold hoping that it appreciates in value. Why? Because historic returns from Gold has been around 9% with pockets of brilliant returns between them. As we mentioned gold gave excellent return from 2006-2013. Consumer Inflation in India has beenin range of 4-9%. So gold is an effective hedge against inflation
- Utility/Fashion value – Gold is a fashion accessory. Women have always fancied gold and jewellery. I dare you to bet money on women who don’t love gold J The percentage will be in low single digits.
- Liquidity – Gold is also liquid. You can easily visit the nearest jeweler to sell it. Even better, you can pawn it to get some short term money. Once you get money back, you can recover the gold.
- Physical/psychological holding – Gold is a tangible asset. It can be felt and used by used. This has a great psychological advantage. Have you wondered why people have great affinity for gold/home/cars. These are assets which they can use and feel which creates a sense of belonging. The same cannot be said with equity/paper financial products.
Different Options to invest in gold in India
1) Physical Gold Jewellery/Bars,Coins
The primary method by which gold is purchased and stored in Indian households. Jewellery is the only major utility gold has. And our women love them. Gold jewellery as an investment has become questionable after other forms of gold investments came into effect.
- Easy purchase option. Just walk into any jewellery store and you can have it.
- Gives psychological sense of possession. You hold it and you get a sense of ownership of the asset.
- You can use it as an ornament/fashion accessory
- Fair liquidity – You can sell it easily or pawn it to get liquid cash in a jiffy
- Gift – You can easily gift it to your daughter or any loved ones during marriage/festivals
- Gold bars/biscuits have considerable less damages than jewellery
- Subject to wealth tax. You need to pay 1% of the value of gold you hold each year if your total wealth is above Rs.30 lakh
- High making/damage charges – This is one major disadvantage if you buy gold as ornaments. Indian jewel makers charge anywhere between 10-20% as damage charges. If it is antique jewellery it is as high as 65%. So if you’re investing Rs.3,00,000 you can lose 40-60k at the beginning itself J
- Questionable purity – You can’t possibly predict the purity of gold especially from smaller jewellers . You have to believe what the jeweler says. And if the quality is low, you get less money when you sell it.
- Storage/Safety – Physical gold has to be guarded by you. You need to pay for storage in lockers at home/bank. There is also the possibility of theft. Considering that, a single loot can leave you stripped with big portion of your wealth.
- Short/long term capital gains period is 3 years. That is, if you sell gold in less than 3 years after buying, you need to pay capital gains tax which is 10% or 20% without/with indexation
When & how to buy physical gold:
- You should buy ornaments only for fashion/jewel purpose.
- Don’t consider it as an investment. You can also buy when you wish to gift to some loved ones on special occasions.
- Don’t buy antiques or jewels with stones if it’s for investment
- Buy from a trusted retailer. Make sure it’s of high quality.
- Don’t buy from Banks. Banks often sell gold but do not buy them back. So better to avoid gold purchases from banks.
- Buy as Bars/Coins if you’re not comfortable with ETFs and don’tplan to wear the gold you buy.
- Check find purity of gold in 30 seconds.
Other than these scenarios, we would not advise to buy physical gold as an investment.
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2) Gold ETFs
Gold ETFs are nothing but Gold Exchange Traded Funds. These are similar to mutual funds except that instead of stocks/bonds they invest in gold. Gold ETFs are gaining popularity in India and rightly so. ETFs started with Rs.100 crores and now the combined Gold ETF in India is near Rs.12,000 crores. Each unit in an ETF represents one gram of gold. You can buy as many units you require.
- Easy purchase/sell option. Even better than physical gold. You can buy/sell them at the push of a button
- No storage problems unlike physical gold. You don’t need to store/carry them. No theft issues –
- No theft issues – The ETFs have secured lockers/storage facility where they store huge volumes just like a bank. Most of them are insured as well.
- Physical backing – For each unit purchased ETFs have to keep proportionate gold in warehouse
- Regulation – Unlike physical gold, Gold ETFs are regulated by SEBI. SEBI keeps a strict watch on all fund houses
- No damages/making charges – Probably the single most reason why you want to invest in Gold ETFs . We make investments to grow our money. There is no reason why we must pay 20% to jewelers if we’re interested in just appreciation in value of gold. You say 20% of your capital
- No wealth tax liability – If you hold gold as investments via ETF you’re not liable to wealth tax on gold. However, you have to pay for other assets J
- Long/short term capital period is just 1 year
- No physical holding/ownership – It’s a non tangible asset. You can’t feel/use it
- Recurring fund management charges – Each year the fund house typically charges you 1% of the value of portfolio
- Demat is mandatory – A demat account is mandatory if you want to invest in Gold ETFs. Also the broker may charge you every time you buy/sell units.
- SIP option not available. You have to buy in units/grams. You can’t invest fixed amount each month. Given below is top Gold ETFs in India.Check the latest Gold ETFs NAV prices here
When & how to buy Gold ETFs
- Buy Gold ETFs if you’re considering gold purely as an investment
- Buy from a reputed fundhouse that manages the ETF
- If you have a longer term horizon – like 5 to 10 years
- If you don’t like paying the jeweler the wastage/making charges
Some common gold ETFs and their current rates/performance
3) Gold Savings Funds
Gold savings funds are nothing but Fund of Funds that invest in Gold ETFs. Sometimes they also invest in companies that mine/sell gold. They are regulated and have provided good return in the past. World gold council also allows them to invest in equity of gold companies
- Easy buy/sell facility
- Invest in multitude of Gold related ETFs/companies. Provides good diversification among gold assets. So even if one ETF does not perform well, the other ETFs held by the fund compensate.
- No wealth tax to be paid just like ETFs
- Don’t need a demat account
- Systematic Investment Option(SIP) is available in gold funds. You can invest a fixed amount each month
- Double charges – Since these are fund of funds you have double charges – once for the ETFs(indirect) and once for the Gold Fund itself.
- Equity risk – Since they may invest in gold related companies, they carry equity risk. Ie., there is a chance that a gold mining company may go bust. This may impact fund performance. Whereas in Gold ETFs the only risk is the gold price fluctuation
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E-Gold is provided option under NSEL(National Spot Exchange). The gold is bought directly on your behalf just like ETFs and stored in warehouses.
- All advantages of Gold ETF
- Physical delivery possible if required
- No annual recurring charges or fund management charges.
- Gold with physical backing in warehouses
- No regulator unlike for Gold ETFs
However, recently, NSEL has come under severe flak for corporate management standards. Due to transparency factor, we advice investors not to consider E-Gold for investment unless they get regulated. We believe NSEL will be brought under SEBI or FMC in the near future.
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Here is the quick comparison of the different gold investment options (More of a recap to the points discussed above). Shout out to caporbit.com for comparison
|Physical bullion||Physical gold- Jewellery||Gold ETFs||Gold Savings fund(Fund of Funds)|
|Asset type||Coins, Bars, Biscuits usually called as Bullion.||Well, it’s self explanatory. We Indians know better what jewellery is||A type of mutual fund which invests in gold bullion. Each unit(NAV) is equivalent to 1 gram gold.||A super fund which invests in other Gold ETFs and gold related companies|
|Gold purity||99% or more. Need purity test to determine authenticity/value||Subject to jeweler you buy from. 22 carat Gold is usually 92% gold. Need purity tests to determine value||Gold is tested and stored as 99.5% pure bullion.||No direct gold investments. Dependent on Gold ETFs they hold.|
|Where do you buy it?||Jewellers, Banks||Jewellers||Exchange – BSE, NSE||Mutual funds – online or directly or through their agents.|
|Storage options||At home, bank lockers||At home, bank lockers||Gold is held in mass storage facility with heavy security. Subject to periodic auditing.||No physical gold involved|
|Entry charges||4-6%, banks charge higher||Making charges and damages around 7-20% of value of gold jewellery||Demat brokerage charges||Entry load charged by fund-house.|
|Recurring charges||Locker charges||Locker charges||Fund Management fee around 1% of gold value||Fund management charges around 2%.|
|Exit charge||2-6% as charges from the buying price of that day||Jewels will be bought by jewellers for 4-8% lesser than buying price of the day||Commission charged by your broker||Usually, 1.5-2% exit load if you sell before one year.|
|Liquidity||Fairly liquid||Good liquidity.Can be sold to local jewelers||Fair/high liquidity. Gold ETF units are traded on BSE/NSE. Settlement in T+2 days||Highly liquid. Mutual funds have T+2 settlement.|
|Capital gains treatment –
|10% without indexation, 20% with indexation.||10% without indexation, 20% with indexation.||10% without indexation, 20% with indexation.||10% without indexation, 20% with indexation.|
|Capital gains treatment
– short term
|Short term capital gains tax as per tax slab||Short term capital gains tax as per tax slab||Taxable As per tax slab||Taxable as per tax slab|
|Definition of short term and long term||Short term<3 year
Long term >3 year
|Short term<3 year
Long term >3 year
|Short term<1 year
Long term >1 year
|Short term<1 year
Long term >1 year
|Wealth tax||Liable to wealth tax at 1% a year for excess wealth over Rs. 30 lakh||Liable to tax at 1% a year over Rs. 30 lakh||Not liable to wealth tax||Not liable to wealth tax|
We hope we have provided you with the major options to invest in gold in India. Was this post useful? What do you think about them? Please let us know in comments below or share this post. Your encouragement keeps us going 🙂