Gold has been one of the most lucrative investment options since time immemorial. It has also been a source of wealth since its discovery, and even today, the value and importance of gold have remained strong. Gold is not only used as an investment alternative; it is also a raw material for many industrial processes. It is also kept as a reserve by central banks of different countries. Investing in gold is quite a popular choice because of the high liquidity that gold brings with it. Moreover, gold as an investment can also be an antidote to rising inflation. All these make the yellow metal quite important from an investment perspective.
Let’s explore how to invest in Gold and what are the benefits and risks associated with Gold investments.
How To Invest in Gold?
Buying physical jewellery is the most conventional method of putting your money in gold. However, with changes occurring in the overall investment landscape, new forms of gold investment have also cropped up.
Here are various options to make a gold investment:
1. Physical Gold
It is one of the most common and oldest ways of investing money in gold. It involves buying physical gold and keeping it at your home or bank locker. A significant feature of this investment is its high liquidity. As soon as gold prices rise in spot markets, you can sell them and earn profits.
However, there are some drawbacks as well. It includes incurring very high making costs that have no regulation and transparency. Also, there may be hassles regarding its storage and certain expenses like locker charges. Furthermore, physical gold will always remain susceptible to theft or loss.
2. Gold Exchange-traded Funds
This is a new-age form of gold investment. Gold-based exchange-traded funds offer units of gold in dematerialised form and can also be called paper presentations of physical gold bars. It is the same as making a direct investment in gold, but a significant advantage is that you are eligible to purchase proportionate ownership as per the investment corpus.
Investors do not receive physical gold in this kind of investment. It saves them from all the problems associated with keeping a physical form of the yellow metal. Generally, 1 unit of gold-based exchange-traded fund represents 1 gram of gold.
3. Gold Mutual Funds
Another new-age form of gold investment is buying units of gold-based mutual funds. It is a way by which you can do away with the hassle of buying and storing physical gold with yourself. Under this type of investment, you do not directly invest in gold physically or digitally.
In the case of gold mutual funds, investors put their money in securities issued by different gold mining, jewellery making and gold processing companies. They earn profit as per changes occurring in the price of these securities in the capital market.
4. Digital Gold
Another investment alternative in gold, which is gaining immense popularity daily, especially among new-age investors, is digital gold. As the name goes, digital gold is just like any other digital investment option that entails buying or selling units of virtual gold.
In this case, you do not have access to actual possession of gold. But you can buy and sell units of gold through various fintech platforms. The most significant advantage of this is that it is a convenient yet simple way of transacting in gold.
5. Sovereign Gold Bonds
The union government launched the sovereign gold bond scheme for gold enthusiasts. The nodal agency for this is the Reserve Bank of India. These are gold-denominated securities issued by the Reserve Bank of India.
Investors who already possess physical gold or are thinking about buying physical gold as an investment can buy these bonds and avail interest income on the same. Investors have the option to keep these securities in physical or dematerialised form. This method takes care of the hassles one must undergo while keeping physical gold with them. However, the Reserve Bank of India also provides interest on these investments, and in doing so, gold changes from a passive to an active investment alternative.
What are the Benefits of Gold Investment?
Some benefits of gold as an investment are as follows:
1. Inflation-beating Returns
Gold is an investment option that provides a cushion against inflation to the respective investors. Inflation generally increases an economy’s overall price level; it is a hard reality in every economic system. The yellow metal does not lose its value over time, and in doing so, it helps beat the prevailing inflation rates.
As time passes and the standard of living improves, the price of gold also increases at a commensurate pace. The higher the inflation, the price of gold also increases at the same rate. This helps in keeping a check on inflation.
2. Portfolio Diversification
Another benefit of gold investment is that it helps to diversify your overall investment basket. Diversification goes a long way in balancing out the risks in an investment portfolio, and gold is an ideal asset to carry out diversification. This is because yellow metal prices increase rapidly during the economic crisis while other investment options tumble. Therefore, it offsets losses made in other investment alternatives and provides a sense of strength and calmness to your investment portfolio.
Liquidity refers to how quickly you can convert an asset into liquid cash. Gold is second to none when it comes to liquidity. Whenever the price of gold increases, you can straightaway go to a nearby gold merchant to sell the same and book profits. The high liquidity is immensely beneficial during times of emergency when you are in dire need of money.
Even when gold is kept in digital form, demand for gold is always high. Therefore, it is easy to find suitable buyers even in dematerialised form.
4. Maintaining Currency Balance
Market complexities and uncertainties can go a long way in degrading the value of currencies. This was quite evident during the Russia-Ukraine war when several currencies across the globe tumbled to record lows, including the Indian rupee.
Comparatively, the production of gold is possible only by mining and not by any machine; hence, it maintains its value even in times of crisis. Investing in gold during uncertain times instead of currencies helps investors avoid the negative effects of currency devaluation.
The prospect of gold investment returns is moderate to high, and they are usually low-risk instruments. Historically, investing in gold has been profitable. Even if the price of gold falls, it is only for a short duration and bounces back quite efficiently. Therefore, if you stay invested in gold for the medium to long term, you can experience gains like never before.
6. Simple and Easy to Invest
You will require specialised knowledge if you want to invest in equity and debt securities. You need to thoroughly analyse the different technical and analytical indicators before deciding.
However, this is not the case with gold investments; they are different. The market value of gold is easily available, and you can go to any platform and start investing based on your investment pool.
What Are The Risks of Investing in Gold Assets?
Investing in gold is beneficial to investors since it provides several benefits. However, there are some risks as well. Before investing, you should consider these risks:
- Physical gold always remains vulnerable to theft or loss. Even if you keep them in secured lockers, theft is always possible. Moreover, physical gold suffers from purity issues and manufacturing defects, which may defeat the overall purpose.
- The digital gold segment is relatively new in the Indian market and isn’t as heavily governed as other instruments like fixed deposits
- The gold mutual funds and gold-based exchange-traded funds suffer from market-related risks and volatility. In the case of gold mutual funds, if the financial health of the companies takes a hit, it can degrade the overall investment value.
- Sovereign gold bonds also suffer from a lot of sovereign default risks. This risk has come about mainly because the Reserve Bank of India does not back up physical gold for these securities.
How Do You Invest in Different Gold Instruments?
Now that you know the different forms of gold investments and their benefits and risks, let’s learn more about the investment process. Here is a complete analysis:
|Parameters||Physical Gold||Gold-based Exchange-traded Funds||Gold Mutual Funds|
|Demat account||No Demat account required||You need to open a Demat account if you want to buy units of various gold-oriented exchange-traded funds.||No need for a Demat account to invest in gold-based mutual funds.|
|Purchase||You can directly purchase physical gold online or offline.||The total investment amount would be proportional to the number of fund units purchased.||In the case of this investment option, you put your money in several securities of gold-based companies.|
|Process||There is no paperwork needed to buy physical gold, except billing.||Investing in gold-based exchange-traded funds requires completing KYC.||Different asset management companies prescribe formalities in Gold mutual funds, and KYC is required.|
|SIP Facility||There is no systematic investment plan option available for investment.||You cannot avail of the facility of SIP for investing in gold-based exchange-traded funds.||For gold mutual funds, asset management companies provide systematic investment planning options.|
How are Gold Instruments Taxed?
For gold-based investments, taxation applies at the time of selling or when such investments mature after the completion of a specific period. All gains generated from gold as an investment option come under capital gains.
Depending on the type of investment and the consequent holding period, gains are subject to either short-term capital gains tax or long-term capital gains.
- If the investment period is less than 36 months, all gains accrued from such investments are taxable as short-term capital gains tax (STCG). The rate of taxation of STCG is the respective slab rate of the taxpayer.
- However, if the holding period of gold investments crosses 36 months, all gains from such holding shall be subject to long-term capital gains tax (LTCG). The rate of LTCG is 20%, along with indexation benefits.
However, the tax treatment of sovereign gold bonds differs slightly from other investment options. The interest income on these bonds is taxable. This income is added to your gross total income and gets taxed as per applicable tax slab rates. Moreover, gains arising from these bonds are entirely tax-free if you redeem them after the completion of 8 years.
Gold has been one of the most popular commodity investment options since ancient times, and the situation is similar even now. With the advent of technology and a knowledge-based economy, investment in gold has changed from traditional to newer forms.