Types of Gold Investment in India: Which One is Ideal for You?

Throughout history, few investments have rivaled gold in popularity as a hedge against almost any kind of trouble, from inflation to economic upheaval or currency fluctuations to war.

Gold is one of the most preferred investments in India. High liquidity and inflation-beating capacity are its strong selling points, not to mention the charm and prestige associated with gold. Gold prices usually shoot up when the markets face turbulence. 

Although there are phases when markets witness a fall in gold prices, it doesn’t last for long and usually makes a steady comeback.

When you think about investing in gold, don’t restrict yourself to just buying physical gold, like coins or bullion. Alternatives to invest in gold include buying digital gold, gold derivatives, shares of gold mining companies, or gold Exchange-Traded Funds (ETFs). 

You can also invest in gold by trading options and futures contracts. Let’s discuss this in detail.

How to Invest in Gold?

Here is the ‘golden question’ – how does one invest in gold? Traditionally, it was by buying physical gold in the form of coins, bullions, artefacts, or jewellery. However, there are newer forms of gold investments nowadays, such as gold ETFs, gold mutual funds, and gold derivatives. 

• Simply put, gold ETFs are similar to buying an equivalent sum of physical gold but without the hassles of having to store the physical gold. Hence, there is no risk of theft/burglary as the gold is stored in Demat (paper) form. 
• Gold funds involve investing in gold mining companies. 
• Sovereign Gold Bonds are a form of digital gold issued by RBI.

Let’s discuss their features one by one.

Gold:

• It is an investment in physical gold.
• Investor does not need any Demat Account for the purchase.
• Market fluctuations directly affect the prices of gold.
• There are no additional charges other than the physical gold itself (and the government taxes).
• There are risks of theft and burglary associated with storing physical gold.
• It is best suited for conventional investors.

Gold ETFs (Exchange-Traded Funds):

• The investor buys a proportionate value of gold but not in the physical form.
• The investor needs a Demat Account.
• Changes in the gold prices affect that of Gold ETFs.
• Gold ETFs involve asset management and brokerage fees.
• Gold ETFs remove the burden of trading gold in the physical form.
• They are best suited for investors who have the required time and skillset to invest.

Gold Funds:

• The investment is made in bullion and companies involved in mining gold.
• Many gold mutual funds include silver, platinum, and other metals as well in their investment basket.
• It works on the principle of diversifying, i.e., not putting all eggs in one basket.
• A mutual fund manager on behalf of an asset management company manages the gold fund.
• There is no need for a Demat account to invest.
• Changes in gold prices don’t affect gold funds directly.
• There’s a minimum charge to manage the gold funds.
• They eliminate the risk of theft/burglary and buffer investments to changing market fluctuations.
• Systematic Investment Plan (SIP) is available.
• Best suited for investors who expect high returns by taking calculated risks.

Sovereign Gold Bonds (SGB):

• It is the safest way to buy digital Gold.
• Sovereign Gold Bonds are issued by the Reserve Bank of India on behalf of the Government of India.
• They provide an assured interest of 2.50% per annum.
• The bonds are denominated in units of grams of gold with a basic unit of 1 gram; the maximum investment one can make is 4 kg.
• These bonds have a tenor of eight years with an exit option from the fifth year onwards.
• It’s again a hassle-free way of gold investing as you have the ownership of gold without any physical possession.

Documents Required for Investing in Gold

More than ₹2 lakhs of investment in physical gold demands a PAN Card, whereas in ETFs, you shall have to open an account with a brokerage firm followed by a Demat account with the same firm. For investing in SGBs (Sovereign Gold Bonds), Know Your Customer (KYC) norms require the documents needed to buy physical gold (Aadhar, PAN, Voter ID, or Passport).

Why Should You Invest in Gold?

A very important question that might cross your mind is, why gold when we have so many other options. 

Safety, liquidity, and returns are the three criteria most risk-averse investors look for before investing. While gold meets the first two criteria without any hiccups, it doesn’t perform poorly at the last one either. 

• Investing in gold is worthwhile because it is an inflation-beating investment. Over time, the return on gold investment has been in line with the rate of inflation.
• Gold has an inverse relation with equity investments. For example, if the equity markets start going down, gold would typically perform well as a hedge instrument. Considering gold as an investment option in your investment portfolio will be a buffer to the overall volatility of your portfolio.

Which Gold Option Should You Choose?

The initial cost of owning physical gold in the form of bars or coins is anywhere around 10%, and it is even higher for jewellery. SGB and Gold ETF, both paper-gold, are cost-effective as there is no entry cost in SGB, while the cost for Gold ETF could be around 1%.

SGB should benefit those who want to invest in gold for a longer period as its maturity is after eight years, although the lock-in ends from the fifth year. However, gold ETF provides much better liquidity than SGB. Owning units is much easier than SGB, as it’s entirely online in the case of ETFs. The risk of owning holdings also doesn’t exist in both.

The big difference is on the taxation front. Gains in SGB on redemption are tax-exempt, but gains in gold ETFs after three years are subject to 20% tax post-indexation.

The only disadvantage with gold ETFs is that its units won’t earn the additional interest of 2.5% per annum that you would get for SGBs.

Once you decide as to why you need to invest in gold, is it for marriage purposes or for pure investment? For investments, one should not have more than 10% of the total portfolio in gold.

Gold has long been a popular investment choice in India, known for its cultural and financial significance. When considering gold investments in India, several options are available, each with its own advantages and drawbacks. It’s crucial to evaluate factors such as risk, investment horizon, returns, costs, liquidity, availability, and taxation rules to make an informed decision. One of the most popular types of investment is the gold investment. Here, we break down the key gold investment options in India.

1. Sovereign Gold Bonds (SGBs)

Sovereign Gold Bonds represent government-supported securities denominated in units of gold grams. They are an excellent choice for investors with a long-term horizon. Here’s why:

• Regular Interest Payouts: SGBs provide investors with regular interest payouts in addition to potential capital appreciation.
• Tax-Free Redemptions: If you hold SGBs for at least five years, your redemptions are tax-free. Furthermore, upon maturity after eight years, the redemption proceeds are also exempt from taxation.

SGBs combine the security of government backing with the potential for gold price appreciation, making them a compelling choice for long-term investors.

2. Physical Gold and Digital Gold

Investing in physical gold (jewellery, coins, bars) and digital gold may seem attractive for short-term gains, but caution is advised. Keep the following in mind:

• Lack of Regulation: These options are not regulated by any government authority, which can expose investors to risks related to purity and quality.
• High Buy-Sell Spreads: Physical gold and digital gold often come with significant buy-sell spreads. This means you may pay more than the prevailing gold price when buying and receive less when selling.
• Short-Term Focus: If you intend to capture short-term price spikes. These options might not be ideal due to the costs involved. This can erode your returns.

3. Gold Mutual Funds and Gold ETFs

For investors seeking exposure to gold with a shorter investment horizon (up to three years), gold mutual funds and gold Exchange-Traded Funds (ETFs) offer the following advantages:

• Liquidity and Availability: Gold mutual funds and ETFs are highly liquid and readily available through stock exchanges and mutual fund platforms.
• Taxation Benefits: Despite recent changes in taxation rules, gold funds and ETFs remain attractive, especially for short-term investments. The taxation rules are similar to other short-term options (digital/physical gold).
• Cost Efficiency: Compared to physical and digital gold, gold mutual funds and ETFs offer a cost-efficient way to invest in gold. The costs are generally lower, with no buy-sell spreads.

Minimum Investment Requirement

The minimum investment criteria vary across different gold investment alternatives and serve as a pivotal factor in guaranteeing cost-effectiveness, particularly for newcomers in investing. The subsequent table compiles the minimum investment prerequisites for various financial instruments.

Category of Gold Investment	Minimum Capital Requirement
Physical Gold	Approximately ₹6,000 (equivalent to the price of a 1 gram gold coin)
Gold ETF	Between ₹50 and ₹100 (depending on the unit price of the ETF)
Sovereign Gold Bonds	Roughly ₹5,000 (equivalent to the price of 1 gram of gold)
Gold Mutual Funds	Commencing at ₹100
Digital Gold	Beginning at ₹1

Risk Associated With Investing in Gold

Similar to all forms of investments, gold investment carries inherent risks that differ among various investment options. Below are the primary risks associated with gold investment:

Category of Gold Investment	Key Risks
Physical Gold	Theft, quality concerns, and production losses
Gold ETF	Market risk associated with the fluctuation in gold prices for gold ETFs
Sovereign Gold Bonds	The possibility of the Government of India failing to meet its sovereign financial obligations
Gold Mutual Funds	Market exposure associated with the instability of gold prices
Digital Gold	Insufficient regulatory supervision

Digital Gold operates without regulatory supervision since it lacks oversight from entities like the Securities and Exchange Board of India (SEBI) or the Reserve Bank of India (RBI) at this time. Furthermore, the Indian market for digital gold is currently controlled by just three major players—Augmont Gold, MMTC-PAMP India, and SafeGold, thereby amplifying the overall investment risk.

Gold ETFs and gold mutual funds investments share a common risk, which is market risk stemming from the potential fluctuations in gold prices. This is attributed to the fact that both instruments are primarily tied to physical gold. For instance, gold ETFs allocate investments to either physical gold or stocks of companies engaged in gold mining or refining. Consequently, any rise or fall in the price of gold directly affects the performance of gold ETFs. Gold Mutual Funds, structured as Funds of Funds, primarily invest in gold ETFs, thereby making Physical Gold and stocks of gold mining/refining firms the fundamental assets for these schemes. Currently, both of these financial products are subject to regulation in accordance with SEBI guidelines.

The sovereign default risk associated with Sovereign Gold Bonds arises from the fact that this instrument isn’t backed by physical gold but is instead a derivative of gold issued by the Government of India via the Reserve Bank of India (RBI). In this scenario, the Government employs the gold price as a reference point and releases bonds, ensuring periodic interest payments along with the investment’s value upon maturity. A sovereign default, in this context, signifies a situation where the Government of India becomes unable to meet its scheduled debt repayments. This scenario typically arises when a country accumulates substantial debt levels while concurrently experiencing an economic downturn. However, presently, the likelihood of this happening in India is minimal.

With Your Share India Digital Account, you can choose from multiple types of gold investments, along with other commodities, currencies, and equities. To sign up for a new account, click here.

Disclaimer: Any advice or information in the post is general advice for education purposes only and is not responsible for generating any trading profit for anyone. Please do not trade or invest based solely on this.

Conclusion

Gold investment in India has a long-standing history and a modern financial strategy, offering a multitude of options tailored to various investor needs. 

Understanding the different forms of gold investments is essential. From physical gold in the form of jewelry, coins, or bars to digital gold accessible through digital platforms, gold ETFs, gold mutual funds, and sovereign gold bonds—each avenue has its own unique characteristics, benefits, and risks.

Frequently Asked Questions (FAQs)