For centuries, gold has been viewed as a household investment and a way to build financial security. The financial market has evolved and Indians now view gold as not just a physical asset but an investment to diversify their portfolio. Investors can look for low transaction costs and taxations, investment amount and flexibility and great returns without missing liquidity for a gold investment plan.
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Ways To Invest in Gold
There are many ways in which you can invest in gold, and here are the most popular ones.
Gold Jewelry
Gold jewelry has traditionally been considered a safe way to invest in gold by Indians, especially in rural areas and small towns, partly due to the lack of awareness or the lack of access to invest via other ways.
If you’re keen on buying gold jewelry, consider the following:
Availability: Almost all jewelers sell gold jewelry in India.
Credibility: You should do your due diligence while choosing the jeweler for your purchase. If you’re buying it as an investment, make sure you buy hallmarked jewelry. This means the purity of gold has been verified under a government process, which will be important if you choose to resell the jewelry.
Cost: The cost of buying jewelry involves the cost of gold and a manufacturing cost that ranges from 5% to 20% over and above the cost of gold. This cost of making the jewelry is a cost that you may not be able to retrieve when you sell your gold jewelry.
Maintenance: When you purchase physical gold, you need to have a safe space to keep it. This might involve locker rental and insurance costs.
The locker rental can vary depending upon your choice of bank. For instance, a safe deposit locker at a well-known private bank ranges anywhere between INR 750 – 12,500 depending on the location of the branch, size and the kind of locker that you opt for.
Similarly, insurance costs to protect your gold jewelry also varies from one general insurer to another. For instance, few insurance companies offer protection to jewelry as a part of their home insurance plan and costs associated with it differ depending on the cost of your jewelry and the plan you opt for.
Taxes: You have to pay 3% goods and services tax (GST), at current rates, when purchasing gold jewelry. You won’t be able to recoup this when you resell your jewelry.
You, instead, have to pay a capital gains tax on the profits made from your sale of jewelry. If you sell it within three years of buying it, your gains are taxable as short-term capital gains at normal tax slab applicable to you without any rebate.
If you hold onto your gold jewelry for at least three years, your gains are taxed at a flat 20% rate with the benefit of indexation. Indexation is basically an adjustment to the purchase price of the asset or investment to reflect the effect of inflation, at a rate declared by the Income Tax department.
Be sure to consult your tax advisor to determine what taxes you may owe.
Upside: You can tap into the value of your gold jewelry even before you sell it using gold loans from banks and non-banking finance companies (NBFCs). You can get a gold loan for up to 75% to 90% of the gold value at interest rates of as low as 8% per annum.
Gold Coins And Bars
If you intend to add physical gold to your portfolio but don’t want to pay the markup associated with gold jewelry, you can consider gold coins or bullion bars with fine gold content of 22 carat or 24 carat (995 and above).
Here’s what to consider when looking at gold coins and bars:
Availability: Gold coins and bars are available in 22 carat and 24 carat and generally come in tamper-proof packaging. Gold coins are available in different denominations ranging from 1 gram to 50 grams and in different designs. If you are looking for a higher denomination, gold bullion bars are available in 100 grams and 1 kilogram increments.
The Indian government and MMTC sell gold coins known as “India Gold Coin” (IGC). These are Bureau of Indian Standards or BIS-hallmarked , which assures 24 carat purity and 999 fineness.
You can buy gold coins and bars from non-government sources such as jewelers and bullion traders.
Credibility: All coins are generally BIS-hallmarked and before making your purchase, you must ask for a purity certificate from your jeweler or trader. The due-diligence requirement for buying a gold coin or bar is the same as in the case of jewelry.
Cost: The making charges for gold coins range from 2% to 10% over the cost of gold. Manufacturing costs for bars drop to less than 0.5% of the gold cost and even lower for 1 kilogram bars.
Maintenance: The storage cost for both gold coins and bars is at par with gold jewelry.
Taxes: The taxes on your coins and bars are similar to that of gold jewelry. You need to pay 3% GST, at current rates, while purchasing gold coins and bars. This amount is not recoverable when selling your coins or bars.
Upside: Coins and bars are easier to sell and have lower markups based on the gold amount used as compared with jewelry. Many lenders do not accept coins and bars for the purpose of gold loans. Some accept gold bars of minimum 50 grams with a purity of 99.99% or 24 carat.
Factors to Consider When Buying Gold
Gold as an asset can help you create a secure portfolio for your financial goals for its reliable returns even in the worst times and no more sleepless nights due to the volatility. Here are key points to remember when choosing gold for your portfolio.
- Portfolio allocation in gold and benchmark indices should be on the basis of periods for which savings are done. Gold allocation for 12 to 60 months should ideally be high enough as those are the periods when the financial stress is higher. Whereas, allocation in gold can be adjusted lower if it is for 10 years or more due to smoothening of economic volatility in the longer run.
- The rising interest rates amidst variants of Covid virus has not led, so far, to a hard landing of the equity markets unless that gets triggered by a tail risk event.
- Typically, increase in currency volatility has the same impact on gold prices, and investors have generally been on the side-line when there is a directionless trade.
- One should also consider that we as human beings are prone to behavioral biases, such as hyperbolic discounting, among others. It is best to keep behavioral biases to a minimum as getting rid of them might not be humanly possible.
- Given the current circumstances, it could be wise to allocate gold between single and early double-digit figures, depending on one’s risk propensity and ability to handle volatility.
Featured Partners
Account opening charges
INR 0 for first year
Brokerage
INR 0 brokerage
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Buy digital gold for INR 100 with Angel One, 2.5% fixed interest guaranteed annually
Account opening and AMC charges
INR 0
Brokerage
INR 0 brokerage
Features and Benefits
Zero GST, Redeem tax-free on maturity, Gold price appreciation + 2.5% interest
Sovereign Gold Bonds (SGBs)
India is one of the countries that has the largest consumer market for gold and still produces the minimum amount itself. To meet the demand of the consumers, the country needs to import gold and to reduce the burden of import the Reserve bank of India (RBI) issued sovereign bonds on the behalf of the Indian government in the year 2015.
SGBs are supplied in multiples of grams with just a minimum investment of 1 gram of gold. The gold bonds are sold on a per-unit basis and each unit obtains its value with 999 purity from underlying a gram of gold.
An individual can invest up to four kilograms per annum in SGBs and trusts have a limit of 20 kilograms per annum. These holdings are redeemed on the date of redemption at a price equal to gold value at the time.
The benefit of investing in SGBs is its low cost transaction with assured interest rate of 2.5% per annum. The interest can be paid half yearly.
Availability: SGBs are available through post offices, brokers of stock exchanges, commercial banks, security trading companies and Stock Holding Corporation of India and other stock depositories.
Credibility: SGBs have the backing of the Indian federal government that offers top safety that brings relief to the investors.
Liquidity/Tenure: SGBs give you the benefit of early redemption after five years of investment when the maturity period is of eight years. This option can be implemented anytime after five years on interest payment dates. Due to its low transaction cost, the selling price is lower than the prevailing gold price at the exchanges. Therefore, their liquidity is less compared to physical gold.
Cost: The India Bullion and Jewelers Association Limited published the issuing amount of SGBs to be determined on the average closing gold rate of 999 purity of gold for the last three business days prior to the subscription span in a week. A discount is also allotted of INR 50 per gram if the investors apply online.
Maintenance: SGBs have no storage or insurance charges applicable to them. The investment is effortless and inexpensively held in a Demat account and convenient to keep track of.
Taxation: The interest like any other investment is taxable on SGBs. It is taxed at the tax rate slab suitable that suits the investor. For individuals, capital gains are exempt from income tax on maturity. SGBs are sold via stock exchanges and the profits are taxed under capital gains.
Upside: Just like physical gold SGBs can be used as security for a loan.
Gold Exchange-Traded Funds (ETFs)
The Gold ETFs are equal to old traditional purchasing of physical gold but without worrying about its holdings. It requires the investors to open a Demat account and have the units of gold in a form of a dematerialized way just like mutual funds.
Each unit of gold ETFs can be 0.01 gram or from 0.5 gram to 1 gram depending maybe on the range of funds.
Availability: Gold ETFs are traded on exchanges like the National stock exchange (NSE) and the Bombay stock exchange (BSE) and are issued by fund houses. Investors can invest in it just like shares or through a stockbroker.
Credibility: Gold ETFs have low risk as it is fully backed by physical gold of 24 carats. The stock exchange adds credibility to it if you wish to invest via a brokerage firm.
Liquidity/Tenure: Gold ETFs have no fixed tenure but some mutual fund firms offer an option of redeeming in physical gold. Though it sounds like a good option, normally with a quantity less than 100 grams is not possible. The quotes to trade are available only during trading hours.
Cost: The charges on brokerage are payable every time you trade with no entry or exit fees. If you invest through the fund house, they might charge an annual cost of possession of gold ETF which is the management fee. The range of the cost is mainly between 0.35% to 1% annually on all the assets.
Maintenance: There are no storage or insurance charges applicable as it is held in your Demat account.
Taxation: Gold ETF is not subject to goods and services tax. Investors are just liable to pay tax on any capital gains obtained by selling the ETFs.
Upside: Gold ETFs are accepted as security for a loan. Investors cannot avail of gold loans with gold ETFs. The liquidity of the ETFs makes them perfect for any investors with medium or short investment plans.
Gold Futures
The NSE, BSE and Multi commodity exchange (MCX) of India offer gold futures contracts. It is majorly used by businesses that deal in the manufacturing and trading of gold as a hedging tool against the risk of price.
To suit every investor’s requirement the exchanges also offer the fold futures in small-scale denominations. Trading can be complex to fit skillful investors with great knowledge of derivatives. A gold future contract allows you to buy and sell gold at a later date. The gold contract gets settled on the maturity date but the value will be decided at the time of the transaction.
Investors should maintain a margin till the settlement to avoid the risk of volatility. The range can be between 4% to 10% depending on anticipated volatility in amount.
Availability: The gold futures are available on exchanges like the National stock exchange, Multi commodity exchange and the Bombay stock exchange and multi commodity exchange of India.
Credibility: As gold futures are traded on exchanges, the credibility is high. At the end of the contract, you can look for physical gold delivery in 24 carats purity. It is essential to consult an advisor or broker before any transactions as dealing in gold futures requires skills and knowledge of terms and conditions.
Liquidity/Tenure: The tenure is normally from three months to one year, you can withdraw yourself from the contract at the amount quoted on the exchange. The information on the physical delivery of the gold at the time of maturity is available in the specification section of the contract.
Cost: Investors have to pay certain charges of brokerage, regulatory fees and exchange fees along with the cost of the contract. The NSE and BSE offer a minimum of 100-gram contracts and MCX offers a range of contracts of 1-gram, 8-gram and 100-gram denominations. Investors should check the contract specification on the payable amount for the premium.
Taxes: Investors are required to pay taxes according to the tax slabs on the gains added to their total business income.
Upside: Gold futures is a preferable product for investors who have a future outlook on gold prices. Investors without making complete gold payments can lock future prices. Just maintain the margin timely. It is flexible as you can enter and exist according to your will within the period without any management charges.
Bottom Line
Gold investment can be beneficial as well as can have drawbacks. It is not like stocks and bonds with regular income via dividends and interest but can work very well in providing liquidity and also as a hedge against inflation.
Investors who desire liquidity can consider investing in gold ETFs and funds while the ones who wish to invest for the long-term can consider investing in SGBs.
Frequently Asked Questions (FAQs)
Is gold a good investment?
Buying gold coins, jewelry, or bars as an asset has been the conventional way to invest in gold. Other types of investment on gold include gold ETF, gold mutual funds, sovereign gold bonds, and digital gold. Here, we discuss the ways to buy gold in India, and its current prices in top Indian cities.