A Detailed Guide on Gold as an Investment in India

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 in this age, the value and importance of gold has not faded or reduced. 

Gold is not only used as an investment alternative, it is also a raw material for many industrial processes and is kept as a reserve by central banks of different countries. 

Investing in gold is quite popular because of the high liquidity that gold brings with it. Moreover, gold as an investment can also serve as an antidote to rising inflation. 

All these make the yellow metal quite important from an investment perspective. Read more about to know abot the different gold investment options. 

What are the different ways to invest in gold?

The most conventional method of putting your money in gold is buying physical jewellery. However, with changes occurring in the overall investment lanscape, new forms of gold investment have also cropped up. 

Here are various options to make a gold investment: 

• Physical gold 

It is one of the most common and oldest means of investing money in gold. It involves buying physical gold and keeping them either at your home or locker in banks. A major feature of this investment is its high liquidity. As soon as the price of gold in spot markets rise, you can sell them and earn profits. 

However, there are some drawbacks as well. It includes incurring very high making cost that have no regulation and transparency. Also, there may be hassles regarding its storage and certain costs like locker charges. Furthermore, physical gold will always remain susceptible to the risk of theft or loss. 

• 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 major 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 physical form of the yellow metal. Generally, 1 unit of gold based exchange traded fund represents 1 gram of gold. 

• 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 make a direct investment in gold either in physical or digital form. 

In 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. 

• Digital Gold 

Another investment alternative in gold, which is gaining immense popularity day by day, 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 biggest advantage of this is that it is a  convenient, yet simple way of transacting in gold. 

• Sovereign Gold Bonds 

The union government has launched the sovereign gold bond scheme for gold enthusiasts. The nodal agency for this is Reserve Bank of India. These are gold-denominated securities issued by Reserve Bank of India. 

Investors who already have possession of physical gold or are thinking about buying physical gold as an investment can instead 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 that one has to undergo while keeping physical gold with them. But 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 ofgold as an investment are as follows: 

• Inflation-beating returns 

Gold is an investment option that provide a cushion against inflation to the respective investors. Inflation in general increases the overall price level of an economy; 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 in beating 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. 

• Portfolio diversification 

Another benefit of gold investment is that it helps in diversification of 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 the price of yellow metal increases 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 

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 for money. 

Even when gold is kept in digital form, demand for gold is always high. Therefore, it is not difficult to find suitable buyers even in dematerialised form.

• Maintaining currency balance 

Market complexities as well as 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, production of gold is possible only by mining and not by any machine and hence it maintains its value even in times of crisis. Investing in gold during uncertain times instead of currencies helps investors in avoiding the negative effects of currency devaluation. 

• Returns 

The prospect of gold investment returns are 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 it bounces back quite efficiently. Therefore, if you stay invested in gold for the medium to long term you can experience gains like never before. 

• 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 making a decision. 

However, this is not the case with gold investments. 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?

Investmenting in gold beneficial to investors since it provides several benefits. However, there are some risks as well. You should take into consideration these risks before taking an investment decision: 

• Physical gold always remains vulnerable to theft or loss. Even if you keep them in secured lockers, there is always a chance of theft. Moreover, physical gold suffers from purity issues and manufacturing defects which may defeat the overall purpose. 
• The digital gold segment is quite new in the Indian market and isn’t as heavily governed as other instruments like fixed deposits
• The gold mutual funds as well as the gold based exchange traded funds suffer from market related risks and volatility. In 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 type of risk has come about mainly because the Reserve Bank of India does not back up physical gold for these securities. 

How to invest in different gold instruments?

Now that you are fully aware of the different forms of gold investments as well as the benefits and risks associated with them, let’s know more about the investment process. 

Here is a complete analysis:

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 time period. All gains generated from gold as an investment option comes under the 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 rates of the taxpayer. 
• However, if holding period of gold investments cross 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 is a bit different from other options. The interest income on these bonds are taxable. This income gets added to your gross total income and gets taxed as per applicable tax slab rates. Moreover, gains arising from these bonds are completely tax free if you redeem them after the completion of 8 years. Final Word Gold is 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 forms to newer forms.