How to invest in Gold? Gold has traditionally been a favorite investment vehicle for Indians and not knowing the various channels available, and the one that is best suited for them costs people dearly. In this article, we will explore various investment options for gold and find the one that is best suited for you.
How to invest in gold in India?
There are various methods for investing in Gold in India. However, many people, at least retail investors still prefer the age-old method of buying jewellery either from their trusted jeweller or from big names like Tanishq. This becomes their undoing as they incur huge costs that could have been saved if their purpose was to invest in Gold.
So let’s explore the various options to invest in gold in India
Buy ornaments from jewellery shops
As mentioned above, this is by far the most used method to buy gold in India. Housewives reason that gold jewellery provides them the comfort of security since that is controlled by them unlike money or other financial instruments. To be fair, this actually does come to some people’s rescue in trying times when other options are closed.
However, this method attracts a hefty making charge. Generally starting from about 5%, this can go as high as 40% or even more in highly designed jewellery. Losing around 20% at the start of investment is like a gut-shot and would probably take years of growth to recover. Hence this method is not advised just for investment’s sake.
Another problem is that you don’t know the purity of the item you buy. In most cases where the buyer is uninformed, either the purity is questionable or the rates are high for the purity mentioned. For example, the shop might charge a 24-carat rate for 18-carat purity. These issues come to light at the time of selling which happens after decades if at all, at which time the investor faces loss.
On the other hand, if increasing the social and not the financial capital the primary purpose then by all means deck yourselves with beautiful designer sets. The alternative (diamonds) are even worse for your portfolio – won’t comment anything about the look though.
Gold Saving Schemes from Jewellers
Another form of investment that is popular in tier 2 and tier 3 cities is of saving some money with a jeweller on a monthly basis (or some other periodical fashion). At the end of the saving period, the investor can buy jewellery from the jeweller. The jeweller may also add some bonus amount depending on the scheme or the item you buy.
There are some apparent risks associated with this – the first and foremost is the credit risk of the jeweller. There have been instances where the jewellers shut shop and people have lost their hard-earned money.
Secondly, if there is no bonus amount, interest is lost that the money could have earned in a better investment instrument. If there is a bonus amount, then also there is an issue that the making charge might be high which might cover bonuses, profits and more!
Thirdly, since the exit might be through taking jewellery from that jeweller there is obvious liquidity risk which might be a big issue with the kind of families that do invest in these schemes.
Overall, I believe that it is better to stay away from such schemes.
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Buy coins and bars
If having physical possession an absolute necessity, buying coins and bars is a much better investment option than buying jewellery. This is because, while the making charges are present in this also, they are negligible as compared to the charges in ornaments, especially if the quantity is large.
Secondly, since there are comparatively very lesser making charges, coins and bars can be bought from big brands. This reduces the chances of the issue of purity or cheating in any other way. These can also be purchased from banks which would further reduce these issues.
One issue in both these forms however is the handling cost. You might have to take some sort of security measures to safeguard your belongings against theft. This would reduce the return you get.
ETF is the short form for exchange-traded funds. These are open-ended funds and you can buy and sell them on the stock market. The fund managers for this track gold prices and invest in 99.5% purity gold for a major percentage of the fund value, and the balance is invested in debt. Hence, investment in these funds means taking a position on gold.
Investing in gold ETFs requires a Demat account that may be chargeable, basis the platform, and also has some expense ratio (annual maintenance charge) which might be 0.5% to 1%. There are some funds that may have even lower expense ratios. Also, there might be some commissions on buying and selling basis the broker you use.
There are some startups like Upstox that offer free Demat and trading accounts plus some other benefits which users can avail of by registering till these companies are on a growth path.
Hence, if you want to invest thinking that prices might increase in the future and don’t bother about the physical possession, this might be one of the ways. The minimum investment is for 1gm of gold.
These are essentially mutual funds that invest in Gold ETFs and other related assets. This does not require a Demat account but the charges are higher compared to ETFs. This is because the charge for ETF in which these funds invest is there and then there is an additional charge for the mutual fund itself.
These are also less liquid since unlike ETFs these are not traded on the exchange and also carry an exit load which may be for withdrawal under a year. The minimum investment amount is generally Rs1000.
From an investment point of view, if you know what you are doing and already hold a Demat account, I believe that ETFs would be better than mutual funds.
Nowadays startups have started offering digital gold in which you can invest at market prices in digital gold from Re 1. These startups have an association with either gold manufacturers or traders. There is an option to take back value or physical delivery. Physical delivery might have a constraint of minimum weight and would attract making and delivery charges.
Sovereign Gold Bonds
The government of India has come up with the Sovereign Gold Bond Scheme in which an investor can buy gold bonds of 8 years of maturity. These can be exited in the 5th, 6th, or 7th year also. Some important aspects of the scheme are:
- You can get some discount by choosing the online option of investing
- You get a 2.5% annual interest – paid semiannually – TDS at source is not deducted
- Returns are tax-free if held to maturity
- These are traded in the market – however, might trade at discount because of lower liquidity
- Individuals can buy from 1gm to 4kg annually
Tip: Investors can compare the fresh issue and those being traded in the market and choose the one that gives the best ROI.
Having gold jewellery is probably the first thing that you would buy because it would serve a dual purpose. However, just for investment purpose jewellery is a very bad option because of the loss in making charges and other issues discussed above. Saving schemes with jewellers is best to be avoided.
In a world going digital, physical possession should be best avoided because of the carrying costs and making charges. For long term investment, I believe that the government sovereign gold bond scheme is particularly good as it has tax benefits and a 2.5% income. However, for the short term, Gold ETFs may be a good option.
Ravi is an IIM ranker with over 9 years of work experience and has helped optimize the growth and financial performance of companies like BPCL, Sun, Ola, Swiggy, Curefit, and Rupeek. In this blog, he explains how to improve personal finances, do growth hacking through digital marketing or other initiatives, and provides a sneak peek into the financial models of companies – especially startups.