For Indians, Gold has been a symbol of wealth and power and it always will be. In some parts of India, people actively buy physical gold and store it in their bank lockers. It is then passed on at weddings, religious festivals and also when generational wealth is transferred. This article is purely written from an investment point of view and doesn't look into all the intangible benefits of buying physical gold. But if you want to buy gold from an investment perspective, keep on reading!
We have also published a video with Mr. Raghvendra Nath, CFA (MD: Ladderup Wealth) on Gold and best ways to invest in Gold, you can watch it here:
But Why Invest in Gold?
Gold is seen as a commodity that has generally been able to beat inflation and generate higher returns comparatively. In addition to this, it has been generally seen that there exists an inverse relationship between the NIFTY50 Index and Gold price.
Just looking at the above chart makes the case for gold as a good hedge against the market. Gold (Blue Line) shot up a lot during the pandemic when NIFTY50 (Yellow Line) was falling like anything and even when the Russia-Ukraine war started in Feb 2022, Gold rose above the NIFTY50 in a matter of days.
So it would be fair to say that investors find comfort in investing in the yellow matter when any crisis starts.
Currently, there are multiple ways where you as an investor can invest in gold.
Gold Mutual Funds
Sovereign Gold Bond (SGBs)
Let's look at all of them one by one.
Gold ETFs refer to a collective pool of funds invested primarily in gold bullions or derivative instruments having gold as an underlying asset. The gold is in the form of bullion with 99.5% purity under the custody of a custodian appointed. Your investment amount shall get converted into units credited into your DEMAT Account where one unit = one gram of gold. These units are publicly traded on a stock exchange.
Under Gold ETF, an investment shall be subject to an expense ratio (0.20%-1%). Prices of a Gold ETF are dependent upon the market factors of demand & supply.
Below is the list of a few fund houses selling Gold ETF (not an exhaustive list), all of them have different expense ratios, UTI Gold ETF seems to be performing the best for the expense ratio it charges. The 1Y Gold Return was roughly at 22.27% so UTI Gold ETF has done a fair job tracking it as well.
Gold Mutual Funds
Gold Mutual Funds also collectively pool money in a fund that is ultimately investing in Physical and Paper Gold. Paper Gold includes Gold ETFs, SGBs, etc. Generally, a Gold Mutual Fund has an expense ratio higher than that of a Gold ETF.
The difference between a Gold ETF and a Gold Mutual Fund is:
|Base||GOLD ETF||GOLD Mutual Fund|
|Underlying Asset||Bullion & Gold Derivatives.||Gold ETF, Digital Gold, Bullion, SGBs, Gold Derivatives.|
|Expense Ratio||0.2%-1%||0.5%-1.5%+Exit Load|
|Pricing||Publicly traded on the Stock Exchange, Real-time Pricing||Pricing based on NAV|
To invest in any Gold Mutual Fund, you can either go via a platform like MF Utilities or directly to the MF House to open a new folio account and transact.
Sovereign Gold Bonds (SGBs)
Sovereign Gold Bonds are debt instruments issued by RBI only for Resident Individuals and are governed by the regulations mentioned here.
SGBs also have the underlying as gold but come with an additional advantage that they carry an interest rate of 2.5% p.a. paid semi-annually to the SGB holder. This interest is taxed as per your income tax slab rates.
Another advantage SGBs have is that the government has exempted capital gain tax applicable on redemption if you hold the SGBs till maturity.
However, if the bonds are sold in the secondary market or transferred, capital gains shall be taxable but the investor shall get the benefit of indexation.
On maturity, the SGBs shall be redeemed in Indian Rupees and the redemption price shall be based on a simple average of the closing price of gold of 999 purity of the previous 3 business days from the date of repayment, published by the India Bullion and Jewelers Association Limited.
Steps to invest in Sovereign Gold Bonds
Application to the investment can be made through physical submission of Form A or via an online application of your scheduled commercial bank, stock exchange, Clearing Corporation of India, or Post Office.
Filling in the necessary details such as KYC Forms and Bank details online.
Post-investment, you shall receive an acknowledgment receipt which should look something like the one below.
Investment in Physical Gold involves the addition of many non-value-adding expenses like making charges, 3% GST on retail purchase & storage costs to prevent the risk of theft. Additionally, Physical gold also contains the risk of purity, i.e., the vendor might tamper with the quality of gold. From April 1, 2023, it has become mandatory for a jeweler selling physical gold to obtain certification of Hallmark.
Of course, speaking purely from an investment point of view, this shouldn't be an ideal way of investing because you pay upfront 3% GST and you will also have to pay 20% tax (for LTCG gains) and tax as per your income slab (for STCG gains)
LTCG Gains are only considered if the physical gold is held for 36 months or more.
Nowadays many fintech apps have popped up allowing you to buy gold digitally. Digital Gold is no different from buying physical gold, the only less headache is that you don't have to store it on your side. You buy it digitally and the issuer stores it for you in their lockers.
This type of investment is however not regulated by any authority. Post Investment, you can utilize the balance for one of the following:
- Lease it to a vendor like a jeweler to earn some extra interest annually. These vendors are generally verified by the digital platform to ensure the safety of your assets. One such platform that allows this is Gullak Gold+ which pays 5% p.a. interest on the gold you lease to a vendor.
Redeem the units in exchange for physical gold
Transfer it as a gift to a third person if you want to but again this will attract taxes.
Digital Gold also attracts a 3% upfront GST charge and has the same tax structure as physical gold. The interest you earn from leasing that gold to a vendor will also be charged as per your slab rates.
Conclusion: Which Option is Best?
Depending upon the preferences of the investor in terms of liquidity, interest rates, taxation, upfront investment and intangible benefits, investors have a variety of options.
Speaking purely from an investment point of view, SGBs are the best option given they pay 2.5% extra interest over and above capital appreciation of Gold prices and have favorable taxation but that's only available if you hold it till maturity. If your time horizon is not that long, go for an instant liquidity Gold ETF which has good performance in tracking physical gold prices and has a relatively better expense ratio.
Earning interest on Digital Gold might also entice you but remember the upfront 3% GST and then the risk of these unregulated platforms doing any form of fraud or going bust. RBI/SEBI will not help you in that case so overall it may not be worth it.
Below is a summary of expenses incurred in the purchase of each type of gold investment.
Source: Shweta Jain (LinkedIn)
Also to compare the returns of different options available, here is a hypothetical example for Physical Gold, Gold ETF & SGB.
Source: Gajapriya Annadurai
We hope that was useful and helpful for you to make your decision with respect to gold. If you have any questions on this, we are happy to answer them in our WhatsApp community. If you are not a part of it and would like to join, please apply at the link below:
Please note that this is an opinion blog and not official research advice. I am not a registered RIA in India, and none of these views reflect those of my current employer. This blog aims to promote informed decision-making and does not discourage you from investing in any deals.
We plan to come up with more blogs discussing different types of instruments available in the world of startup investing, write on due diligence for some platforms, and also existing and upcoming alt investment deals in the Indian market. If you want to stay updated on the latest blogs, please subscribe to our newsletter so you get notified automatically.
Thank you for reading and hope to see you in the next one!