Why and how to invest in gold

11 May 2022
Why and how to invest in gold

Shaky unstable markets like the one we’re witnessing can undoubtedly have an impact on our financial future, especially if you invest in equities and related securities. Opportunities like these may show you the vulnerabilities in your portfolio. If you’re looking for safer assets to hedge your investments then gold is a tried and true friend.

Gold has been around and existed as a form of currency and investment asset for a long time in modern human civilization. Societies, economics, and entire nations place their trust in gold as a security, because it is reliable and a safe bet to fall upon even when other forms of fiat currency fail us.

You might notice that gold prices tend to shoot up every time stocks falter, mostly because people believe in the long-held belief of securing your long-term investments through gold, and flood to the asset to offset their portfolio’s losses.

Here are a few reasons you should invest in gold too:

Hedging against turbulences

Hedging refers to the act of safeguarding assets such as your investments, from depleting. Gold has historically been demonstrated to hold its value. Due to its malleability and easiness to pass on from one generation to another, it remained as a valuable form of investment. Even today, if the value of the rupee depreciates, gold prices will not only hold their own and remain relatively stable, they might even sky-rocket as people tend to flock to the security, in turn raising gold prices.

Similarly, in times of geopolitical tension too, gold has the ability to stand its own, since it has a near negative correlation with the markets. This, however, doesn’t apply to gold-related securities. For instance, while gold prices have been steadily increasing right now, the stock price of popular gold retailer TBZ will still move with the markets and can be down.

Hedging against inflation

Investing in gold is also a good way to combat the steady rise of prices against inflation. Since gold has a constrained supply and ever-growing demand, its price, in the long run, only steadily increases.

Investing in gold, is thus, an opportunity to grow your money faster than inflation so that your investments can maintain their purchasing power in the future.

Stability and reliability

Gold also offers a reliable and stable way to invest because gold prices are relatively uniform across global markets. When you purchase physical gold, it's fairly easy to liquidate your asset as gold prices generally climb over time, and most banks and local jewelers offer immediate cash at the going rate provided by the quality and mark of the metal. While storing physical gold does come with its challenges, bullions and jewelry can often also be used as collateral to take loans against.

Different ways to invest in gold

Apart from the traditional route of purchasing gold in its physical form there are tons of new options on the market now, towards investing in gold hasslefree such as gold schemes, digital gold, gold etfs, mutual funds etc.

Let’s break down 4 popular options- Gold ETFs, Gold Mutual Funds, Sovereign gold bonds and physical gold to see how they compare and what their different tax implications are:-


Physical gold 

Gold ETFs

Gold Mutual Funds 

Soveriegn gold bonds 

What

Directly purchasing physical gold in the form of coins or bullion (gold bars) from bank or maker. Can be purchased in the form of jewelery as well (will affect resale value) 

Instead of physically holding the gold, investors have the option of buying a digitally proportionate ownership instead.

The investment is made in gold related securities such as companies that mine or manufacture the gold

Backed by the RBI and the government, SGBs offer an alternative to investing in solid gold. You pay the issue price and receive the cash back on maturity.

Critieria 

There are geenrally no restrictions or legal criteria needed to buy physical gold. It is however, always preferred to ensure certificates or other marks of authentication can be produced at purchase.

Gold ETFs are listed on the stock exchanges like any other share. You need to be a demat account holder to transact.

You don’t need a demat account for Gold MFs.

You don’t require a demat account to purchase SGBs. However, if held in the Demat form, they are available to be traded on exchanges, after maturity. 

Investing period 

Physical gold does not have any investing period. As a commodity, it can be bought or sold as desired, on the current rate. 

Gold ETFs too, don’t have an investing period they can be bought and sold daily, or held for any period of time.

Since these are mutual funds they might come with lock-in periods. 

Though the tenure of SGBs is technically 8 years, eafrly encashment is allowed after the 5th year from the date of issue.

Tax, Fees and charges 

Buying physical gold generally has the implications of making charges that the investor has to bear. Besides this security and safe storage (in lockers etc) to avoid the risk of theft is another cost to consider.

Gold ETFs generally have a low expense ratio and are taxable like any other equity security. (ie Short term - taxed within your income slab, long term - 20% with cess) 

Gold MFs have a higher expense ratio than ETFs as they are actively managed to track the benchmark of the domestic price of gold. These funds may also have a lock-in period, which can extract an exit load if withdrawn early. Some of the top performing funds offer between 11-12% returns on average. 

SGBs are taxed under capital gains. Under long term capital gains you can transfer or sell the bonds after the 5-year term, where the tax rate applicable is 20% along with cess minus the indexation benefits

SIP

No option to invest via SIP

Can’t be invested through SIPs 

Gold MFs offer SIP options to investors. 

SGBs are a one-time payment option.

In the end, there are many different options available to investors looking to diversify their portfolios with gold, they should base their decision on their investing expertise, objective, and risk tolerance.