Gold has a vague history. In times before the 1970s, many powerful countries backed their currency with gold. This was known as Gold Standard. In the United States, every dollar could be exchanged for 1.5g of gold. The world has gotten rid of the Gold Standard for good. Now, gold has become a tradable commodity instead of a currency. Had you bought Rs 1 lakh worth of gold in 2010, it would have been worth Rs 2.60 lakh today. Gold prices have increased by more than ~160% in the past decade. Investing in gold has its own benefits. With innovation and technology, you need not step outside your home to buy gold. In this piece, we explore what are the different ways one can invest in gold.
Types Of Gold Investments
One can use the good old way of walking into a jewelers shop and buying gold jewelry, biscuits, coins, etc. However, you might end up spending more on it since you’ll have to pay for the making charges and also account for a loss of quality with time. In the case of storing in a bank locker, one might end up spending on the locker charges as well. Physical gold might be misplaced, forgotten, or stolen. You might also need to buy a minimum significant amount of gold which might require a high capital investment.
2) Digital Gold
One can invest in digital gold for as little as Rs 1. Many entities like Digital Wallets, Brokerage Firms, and Proprietary Jewelers offer digital gold. These include – PayTM, PhonePe, Motilal Oswal, Groww, Kalyan Jewellers, Tanishq By Tata, and many others. One has the option of redeeming the digital gold into physical gold.
One should take note of the ‘spread %’ involved in buying digital gold. This can vary from 2-6% depending on the merchant. A spread is a difference between buying and selling price of digital gold at a given point in time. The buying price for digital gold is always more than its selling period at a given time. The spread amount is used for storage, insurance, trustee fee, etc.
A 3% GST is levied during the purchase as well as the sale of digital gold.
3) Gold ETFs
Gold Exchange Traded Funds or Gold ETFs are funds that are tradable on stock exchanges and require a Demat account. Unlike digital gold, they do not have a spread in buying and selling price at a given time. Units of a Gold ETF are backed by real gold. They can be bought and sold at their traded price during market hours. Unlike physical and digital gold, they do not attract GST at the time of buying and selling. Gold ETFs give an edge over digital or physical gold in terms of taxability and cost of holding.
4) Gold Mutual Funds
Gold Mutual Funds invest in Gold ETFs or gold-related equity shares. Unlike ETFs, they do not require a Demat account. The minimum ticket size of a gold mutual fund is lesser than that of a Gold ETF. If you exit a gold mutual fund before the lockin period, you might be charged an exit load. Gold Mutual Funds can be SIP-based, which means you can invest a small amount over a given period of time.
5) Sovereign Gold Bonds
Sovereign Gold Bonds are bonds issued by the Reserve Bank of India on behalf of the central government. These can be bought and sold on exchanges. Each unit of an SGB is backed by 1 gram of gold. An SGB pays a regular dividend of 2.50%-2.75% per year semi-annually. An SGB if held till maturity or between 5-8 years of the issue is tax-free. When investing long-term, an SGB as compared to other gold investments proves to be the most beneficial in terms of taxability. For premature redemption, a capital gains tax of 20% is applicable on SGBs.
Since pre-historic times, gold has been a safe haven asset. A person would accumulate gold and sell it in times of crisis to make things work. Once can expect gold prices to inflate during an economic crisis and slump during economic growth. Timing is a very crucial factor while investing in gold in order to maximize profit. Each gold investment type is linked to the market performance of gold. Factors such as liquidity, transferability, and taxability make them different from each other. One should diversify their investments even in gold depending on their short and long-term priorities. Until then, stay home, stay safe, and do thorough research before investing.