Amidst the sands of time, an enigmatic allure has always surrounded gold, beckoning generations to seek its secrets. In the realm of investments, this precious metal has stood as a steadfast guardian of wealth, whispering promises of prosperity. Join us as we embark on a journey through the intricate maze of ‘Gold as an Investment in India,’ unearthing the hidden treasures and timeless wisdom that lie within.
In today’s world, gold has emerged as the second most popular form of investment globally, constituting 20% of the world’s physical gold holdings. Individuals invest in gold through various channels, including coins, bars, Gold Exchange Traded Funds (ETFs), Gold Mutual Funds, and Digital Gold.
This blog explores the range of gold investment options in India, offering a comprehensive comparison based on factors like availability, risk, and liquidity. But before delving into these options, let’s unravel the relevance of investing in gold in our contemporary landscape.
A Brief Overview of Gold Investment in India
In the diverse tapestry of India’s investments, gold shines as a precious thread that weaves both tradition and modernity. The allure of this shimmering metal has transcended generations, and today, gold investment in India is an art that combines heritage with innovation.
From the glimmering jewelry that adorns our loved ones to the glittering bars securely stashed away, gold plays a significant role in our lives. It’s not just a metal; it’s a symbol of wealth, security, and a timeless fascination.
However, in this treasure hunt, the question arises: How do you best invest in gold? Fear not, for this journey will take you through the labyrinth of gold investment options in India. Whether you’re a seasoned investor or a novice explorer, there’s a golden path waiting for you to tread.
Join us on this quest to uncover the mysteries of gold investment in India, where history meets innovation, and where every coin and bar tells a story.
Why Should You Invest in Gold?
Here are a few reasons why you should choose gold as an investment :
- Protection Against Inflation: Gold investment safeguards savings from currency depreciation, acting as a shield against inflation. Gold maintains its value over time, making it suitable for long-term investments.
- Tax Advantages: Specific gold investments, like non-equity products such as SBI Gold Fund, provide reduced taxation or tax exemptions, including advantages in long-term capital gains. To explore tax-saving options with gold, refer to this article.
- Stability and Resilience: Gold retains its intrinsic value over the long term and remains relatively resilient during market downturns or global crises. This stability makes it an attractive choice compared to stocks and bonds.
- High Liquidity: Gold is easily convertible to cash and widely recognized by jewelry dealers worldwide. It can be used as collateral for loans, making it a highly liquid asset.
- Returns and Security: Traditional investors prefer physical gold due to its secure nature. Additionally, gold tends to appreciate over time, offering consistent returns in the long run compared to other asset classes.
What are the Types of Gold Investment Options in India?
Here the types of Gold Investment options available in India:
Investing in physical gold has been a time-tested strategy for preserving wealth and diversifying one’s investment portfolio. Unlike digital or paper assets, physical gold offers a tangible and enduring form of wealth that has been cherished for centuries.
Gold bullion, the epitome of direct gold ownership, transcends the confines of Fort Knox’s legendary vaults. It represents the purest essence of gold—certified for weight and purity, whether in the form of coins, bars, or other sizes, all bestowed with a unique serial number for added security.
While the sight of colossal gold bars commands awe, their sheer size, often up to 400 troy ounces, veils them in illiquidity, rendering buying and selling a costly affair. Consider this: possessing a single $100,000 gold bar as your entire gold holding leaves you constrained when you wish to sell a fraction. There’s no sawing off a portion for sale. Conversely, gold bullion in smaller bars and coins offers abundant liquidity, a favored choice among gold aficionados.
For decades, sovereign governments across the globe have issued substantial quantities of gold coins. Investors frequently acquire these coins from private dealers, typically at a premium ranging from 1% to 5% above the intrinsic gold value. However, recent years have seen premiums escalate, reaching up to 10% in certain cases.
Bullion coins offer several advantages:
- Their prices are readily available in global financial publications.
- Gold coins are often produced in more manageable sizes, commonly one ounce or less, rendering them a convenient avenue for gold investment compared to their bulkier counterparts.
- Reputable dealers are easily accessible, with a presence in numerous major cities.
- While older, rare gold coins possess numismatic or “collector’s” value beyond their intrinsic gold worth, investors primarily interested in gold should focus on widely circulated coins, reserving rare specimens for collectors.
- Examples of widely circulated gold coins include the South African Krugerrand, the U.S. Eagle, and the Canadian Maple Leaf.
Nonetheless, gold bullion does present certain challenges. Storage and insurance costs, coupled with the relatively substantial dealer markup, can impede profit potential. Additionally, investing in gold bullion directly ties one’s investment to the value of gold, meaning that every dollar fluctuation in the gold price will proportionally impact the portfolio’s value. In contrast, other gold investments, such as mutual funds, permit smaller dollar investments and may not exhibit the same degree of direct price exposure as bullion.
Approximately 49% of the world’s gold production serves the purpose of crafting jewelry. With the global population and wealth continually expanding, the demand for gold in jewelry creation is expected to rise steadily. However, consumers of gold jewelry have exhibited some sensitivity to price fluctuations, purchasing less when prices surge.
Acquiring fine jewelry at retail prices entails a considerable markup, often reaching up to 300% or more beyond the gold’s intrinsic value. Alternatively, more favorable jewelry deals can often be discovered at estate sales and auctions. The benefit of procuring jewelry in this manner lies in the absence of retail markups, though it does require time and effort to identify valuable pieces.
Despite its investment limitations, owning gold jewelry provides a delightful means of possessing gold. From an artistic perspective, gold jewelry is undeniably beautiful. However, from an investment standpoint, it falls short of excellence—unless, of course, you happen to be the jeweler.
Gold Exchange Traded Funds (ETFs) offer the opportunity to acquire a specified quantity of gold without the need for physical possession. The physical gold is securely stored in paper form, eliminating the associated ownership risks. To engage in gold ETF trading, a demat account is a prerequisite. Transactions involving gold ETFs take place on the stock exchange.
If you desire to invest in gold ETFs, your broker can facilitate the process with the assistance of a demat and trading account. You can commence with as little as a single unit, equivalent to one gram of gold. Gold ETFs also serve as valuable collateral when seeking loans.
Sovereign Gold Bonds
India’s central bank, the Reserve Bank of India, issues these bonds, which are attainable in one-gram increments, allowing investors to acquire up to four kilograms. These bonds serve as government securities, serving as a viable alternative to physical gold ownership. With an eight-year maturity period, investors can choose to exit during the final three years before completion.
Furthermore, sovereign gold bonds offer a 2.5% interest rate on the initial investment. These bonds are actively traded on stock exchanges, providing investors with the flexibility to buy or sell them once the subscription period concludes.
Gold Mining Stocks
Another method for accessing the gold market is through investment in gold mining stocks, which represent shares in companies engaged in gold extraction. The performance and price of these stocks are intrinsically linked to the respective companies.
Investing in gold mining stocks provides the advantage of leverage to the gold price. Nevertheless, it involves inherent risks, including those associated with individual companies, management, and geopolitical factors.
Gold Futures and Options
Futures involve contracts for the future purchase or sale of a specific quantity of gold on a designated date. These contracts are standardized and represent predetermined gold amounts, making them more suitable for experienced investors due to their potential size (e.g., 100 troy ounces × $1,000/ounce = $100,000).
Futures are preferred by some due to low commissions and lower margin requirements compared to conventional equity investments. It’s crucial to note that while some futures contracts settle in dollars, others settle in actual gold. Therefore, understanding contract details is vital to avoid taking physical delivery of 100 ounces of gold on the settlement date.
Options on futures offer an alternative to purchasing futures outright, granting the owner the right to buy the futures contract at a predetermined price within a specific timeframe. Options leverage the initial investment while limiting potential losses.
However, options require payment of a premium above the gold’s underlying value, which contrasts with a futures investment based on the current gold value. Given the volatility of futures and options, they may not be suitable for all investors. Nevertheless, for substantial investments, futures remain a cost-effective choice for buying or selling gold, considering commissions and interest expenses.
Another investment option to consider is digital gold investment, issued in collaboration between India’s Metals and Minerals Trading Corporation (MMTC) and Switzerland’s PAMP, a renowned bullion brand. Purchasing gold is simplified through smartphone-based digital wallet platforms.
The gold you acquire is securely stored under the custody of MMTC-PAMP and can be safeguarded for up to five years, with the flexibility to take delivery at any point during this period. You have the choice to acquire gold in various denominations, such as coins or bars, and the pricing remains transparent, directly linked to global market rates.
Now that we are familiarized with the types of Gold as an investment, the question ‘How do I invest in Gold?’ might arise. Let’s explore that!
How to Invest in Physical Gold?
Investing in physical gold offers diversification and a hedge against economic uncertainties. Here’s are strategies for investing in Physical Gold:
- Set Investment Goals: Define your objectives – wealth preservation, short-term gains, or safe haven. Goals influence your choice.
- Select Gold Form: Gold comes as coins, bars, or jewelry, each with pros and cons. Coins are liquid, while bars may have lower premiums.
- Trustworthy Sources: Buy from reputable dealers. Look for certifications like BIS Hallmark on jewelry or mint marks on coins/bars.
- Beware of Counterfeits: Authenticate your purchase to avoid counterfeit gold. Use independent testing or experts if needed.
How to Invest in Gold Stocks?
Investing in gold stocks through smallcase, an investment platform, is simple:
- Open a Demat Account: Start by setting up an online Demat account with a registered stockbroker. This account holds the shares acquired through smallcase.
- Choose a Broker: Select a broker offering smallcase portfolios with a focus on gold stocks, such as Zerodha, HDFC Securities, or ICICI Direct. Compare fees and services.
- Place an Order: Access the smallcase platform and select a gold-oriented portfolio, like “Equity and Gold.” The portfolio includes gold-related stocks.
- Investment Amount: Specify your investment amount and place the order. The chosen broker will execute the order and credit the shares to your Demat account.
Invest efficiently in Indian Gold Stocks through smallcase, today!
Introduction to Equity & Gold smallcase
This smallcase invests in stocks through the utilization of the ICICI Prudential NV20 ETF, which grants exposure to the top 20 blue-chip stocks selected from the leading 50 market-cap stocks based on value-centric criteria. Additionally, smallcase incorporates the ICICI Prudential Gold ETF to facilitate the desired exposure to gold.
Blue-chip companies generally boast well-established track records, significantly minimizing the risk of such entities facing financial turmoil. The introduction of blue-chip stocks into the portfolio enhances its stability, given the relatively subdued volatility associated with their stock prices.
The gold component within this smallcase acts as a crucial buffer against market fluctuations. Over its historical performance, gold has consistently proven to be the most effective hedge against inflation and geopolitical uncertainties.
This smallcase assigns a 60% weightage to the ICICI Prudential NV20 ETF and a 40% weightage to the ICICI Prudential Gold ETF. Furthermore, the smallcase adheres to an annual review schedule to ensure its alignment with prevailing market conditions.
Disclosures for aforementioned smallcases
How to Invest in Gold Bonds?
Investing in gold bonds in India is hassle-free:
- Check Eligibility: Ensure you meet eligibility criteria, which include resident individuals, HUFs, trusts, universities, and charitable institutions.
- Choose a Tranche: Select a suitable tranche issued by the government throughout the year.
- Open a Demat Account: If you don’t have one, easily open a Demat account with a registered stockbroker.
- Complete KYC: Ensure your KYC documentation is up-to-date, including identity and address proof linked to your Demat account.
- Hold and Trade: Gold bonds are credited to your Demat account, making them easy to hold and trade. Sell them on the secondary market via your Demat account when needed.
- Interest and Redemption: These bonds offer annual interest and mature after eight years. You’ll receive the maturity amount in your linked bank account.
- Tax Benefits: Note that capital gains upon redemption after eight years are exempt from capital gains tax. However, annual interest income is taxable according to your tax slab.
Invest in gold bonds for gold ownership with added interest, conveniently and securely.
How to Invest in Gold ETFs and Mutual Funds?
To enter the gold market without physical ownership:
- Open Accounts: Start with a Demat and trading account with a registered stockbroker or financial institution.
- Complete KYC: Ensure your KYC docs are up-to-date and linked to your accounts.
- Select Your Fund: Choose a Gold ETF or Gold Mutual Fund matching your goals and risk tolerance.
- Research and Compare: Explore options based on past performance, expenses, fund managers, and fees.
- Place Your Order: Buy units or invest an amount through your trading account.
- Redemption and Selling: Easily sell or redeem through your trading account, with proceeds credited to your bank account.
- Tax Awareness: Understand capital gains tax implications, consulting a tax advisor for tailored guidance.
Invest in Gold ETFs and Gold Mutual Funds for convenient gold market exposure with professional management, flexibility, liquidity, and potential returns.
Table of Comparison Between Gold ETFs & Gold Mutual Funds
Here is a comparative analysis of Gold ETFs and Gold Mutual Funds:
|Aspect of Comparison
|Gold Mutual Funds
|Exchange Traded Funds that are traded on Stock Exchanges.
|Mutual Funds that invest in a portfolio of gold-related securities.
|Represented by shares that can be traded like NAV (Net Asset Value)stocks.
|Represented by units orNAV (Net Asset Value)units that can be boughtand sold at NAV prices.
|Highly liquid; can be traded throughout thetrading day.
|Generally liquid, withperiodic pricing andtrading day redemption.
|Active and Passive
|Typically lower due to passive management.
|Expense ratios vary,typically higher than ETFs
Table of Comparison Between Physical Gold & Gold Bonds
Here is a comparative analysis of Physical Gold & Gold Bonds
|Aspects of Comparison
|Form of Investment
|Physical possession of gold coins, bars, orjewelry.
|Ownership of shares ingold mining companies orgold-related companies.
|May require selling and physical delivery.
|Easily traded on stockexchanges, highly liquid.
|Storage and Security
|Need secure storage andinsurance
|No physical storagerequired, reducing security
|Incurs making charges, storage fees, andtransportation costs.
|May involve brokerage fees,but lower than physicalgold’s transaction costs.
|Prices can be relatively stable; less sensitive to short term market fluctuations.
|Prices can be more volatile due to various factors affecting stock markets.
|Tangible and easy to verify: private ownership.
|Ownership represented by shares in publicly traded companies.
|Dividends and Income
|No regular income; gold does not generate income.
|Potential for dividends and capital appreciationthrough stock dividends andprice appreciation.
Liquidity of Gold as an Investment
In the context of investments, liquidity pertains to how easily you can buy and sell them.
Physical gold, digital gold, gold ETFs, and gold mutual funds offer high liquidity, allowing for easy buying and selling, making them liquid investments.
On the other hand, sovereign gold bonds come with an eight-year maturity period. However, this doesn’t mean you must hold them until maturity. If you wish to redeem them before maturity, you have two choices.
Firstly, you can prematurely encash the bonds after five years, following the lock-in period completion. Alternatively, if you want to redeem your investment before the five-year mark, you can list and sell your sovereign gold bonds in the secondary market, which becomes an option after six months from the issue date. It’s important to note that the secondary market has lower trading volumes, potentially resulting in selling bonds at a discount compared to the market gold price.
If you prefer to monetize your investment without selling or early redemption, you can opt for a loan against your bonds. For instance, SBI provides loans against sovereign gold bonds, offering up to 35% of the bond’s value as collateral.
Risks Involved in Gold as an Investment
Gold investments carry varying risks, and here are the key risks associated with each option:
- Digital Gold: This lacks regulatory oversight, as no SEBI or RBI oversight currently exists. India’s digital gold market is dominated by just three players: Augmont Gold, MMTC-PAMP India, and SafeGold, increasing overall investment risk.
- Gold ETFs and Gold Mutual Funds: Both share market risk due to gold price volatility, as their underlying assets are primarily physical gold. Gold ETFs invest in physical gold or gold-related company stocks, while Gold Mutual Funds primarily invest in Gold ETFs. These products are regulated by SEBI.
- Sovereign Gold Bonds: These carry sovereign default risk, as they are not backed by physical gold but rather a derivative of gold issued by the Government of India through the RBI. Currently, the Indian government’s financial stability makes the chance of default extremely low.
Advantages of Gold as an Investment
Here are some advantages of gold as an investment:
- Hedge Against Inflation: Gold has historically acted as a hedge against inflation. When the purchasing power of currency decreases, the value of gold often rises, preserving your wealth.
- Diversification: Gold commodity price offers diversification benefits by acting independently of traditional asset classes like stocks and bonds. Adding gold to your investment portfolio can reduce overall risk.
- Liquidity: Gold is a highly liquid asset, meaning you can buy and sell it easily. It can be converted into cash quickly when needed.
- Portfolio Balancing: Gold can help balance your investment portfolio, especially in times of market volatility. It may perform well when other assets underperform.
- Long-Term Appreciation: Historically, gold has shown a tendency to appreciate in the long term, making it suitable for wealth preservation.
- Tax Benefits: In some countries, there may be tax advantages associated with owning gold, such as reduced capital gains tax rates or exemptions.
It’s important to note that while gold offers these advantages, it also comes with risks and considerations. Therefore, it’s crucial to assess your financial goals and risk tolerance before incorporating gold into your investment strategy.
To Wrap It Up…
Every investment has its pros and cons. If you prefer not to hold physical gold, you have other options like ETFs, gold funds, or SGBs. While gold doesn’t offer passive income like stocks and bonds with interest and dividends, it does provide strong liquidity and can outpace inflation. Generally, the benefits of gold investment outweigh the drawbacks. In summary, long-term investors can choose Sovereign Gold Bonds, while those prioritizing liquidity can opt for the Equity & Gold smallcase!
Gold, historically valued, now serves as an inflation and deflation hedge, diversified portfolios, and offers global financial security amid geopolitical and economic uncertainty.
Gold has delivered a 12% return over 20 years, 10.3% over 15 years, and 7.5% over 10 years. Notably, in one year, it outperformed all asset classes, with a 14.2% return, surpassing Indian equities at 12.9% and US equities at 9.5%.
Investors can buy gold coins from dealers, then sell for profit, providing beginners easy access to gold investment.
In 2023 and beyond, investors find gold appealing due to its global acceptance, liquidity, and potential for long-term appreciation.
To start investing in gold, you can consider various options such as purchasing physical gold, investing in gold ETFs (Exchange-Traded Funds), buying shares in gold mining companies, or opting for gold mutual funds.
The RBI issues government bonds denominated in grams of gold. Individuals and HUFs can invest 1-4kg per fiscal year, while companies and other entities can invest up to 20kg of gold.
Gold mutual funds suit investors seeking portfolio diversification and risk reduction. SEBI regulates them, mitigating investment risks.