Gold has been a symbol of wealth since ancient times and even in the Information Age has managed to maintain its relevance as an investment. In its physical form, currently, around 190,000 tonnes of Gold are available globally out of which 50% is in the form of jewelry. An additional 17% and 13% of global gold reserves are held by Central Banks around the world and used for various industrial purposes respectively.
At present, the second most popular use of Gold worldwide that accounts for 20% of the world’s physical Gold are investments. These are held by individuals in the form of investments such as Coins, Bars, or as underlying assets of Gold Exchange Traded Funds, Gold Mutual Funds, or Digital Gold.
In this blog, we will discuss the key Gold investment options currently available in India and compare them based on key criteria such as availability, risk, return, cost, liquidity, etc. But first, let’s discuss why investing in gold is relevant in today’s world.
The primary reason for investing in Gold is portfolio diversification and in that context, it is considered to be an ideal hedge against the potential volatility of equity investments as well as inflation. Moreover, as shown in the chart below, investments made in Gold have in most cases provided good returns over the past 40 years:
In the above chart, you can see that Gold has on average provided annual returns of 9.6% over the past 40 years, and during that period, only 8 instances of negative annual returns were recorded.
Apart from the returns offered by Gold, another key reason for using it as a hedge is based on the fact that it has historically shown lower volatility than equity investments over the long term. In fact, in many cases, it has shown an inverse correlation to equities, i.e., returns of Gold have historically been high when equity markets have witnessed a downturn.
In the above graph, you can see a few key instances when Gold showed superb performance such as 1991-1993, 1999-2001, 2007-2010, and 2020. In each of these instances, Equity markets had corrected significantly due to various reasons such as the Indian Currency Crisis (1991-1993), Dot Com Bubble (1999-2001), Global Financial Crisis (2007-2010), and COVID-19 Pandemic (2020). Now that we have established why you should invest in Gold even in today’s world, let’s discuss the different ways how you can invest in Gold.
To invest in Gold you either opt for the physical form or the digital form. In its physical form, Gold as an investment can be held in the form of jewelry, coins, bars i.e. bullion, etc. There are, however, a few key limitations of investing in physical gold:Guoabong Stock
To overcome the limitations of physical gold, you can opt for the digital route which includes investments such as Digital Gold, Gold ETFs, Gold Mutual Funds, and Sovereign Gold Bonds. The following is a short description of each of these investment options:
Do keep in mind that while the performance of all the above examples of Gold as an investment is linked to the price of Gold, there are significant differences between them in terms of risk, returns, availability, liquidity, lock-in period, and taxation. Let’s discuss these aspects of Gold investment options in detail starting with risk.
Like any type of investment, Gold as an investment is also prone to various risks which vary from one investment option to another. The following are the key risks associated with each of these investments:
Next, let’s compare these investment options based on minimum investment amount to determine their affordability for investors.
The minimum investment requirement differs from one Gold investment option to another and plays a key role in ensuring affordability, especially for new investors. The following table sums up the minimum investment requirements for different instruments:
From the above table, you can see that the entry point when making investments is lowest in the case of Digital Gold and Gold Mutual Funds while Sovereign Gold Bonds, Gold ETFs, and Physical Gold require significantly higher minimum investment amounts.
In case you are opting for gold as an investment, returns generated from the investment are inversely correlated to the cost of making the investment i.e. lower costs lead to higher returns and vice versa.
The reason for this is because the underlying asset is the same i.e. the price of gold – an increase in price would lead to an appreciation of your investment, while a decrease in price can potentially lead to a loss. The following are the costs associated with each investment:
In the cost section for Digital Gold, you will see the term “Spread”. This “Spread” is the difference in the buying and selling price for the investor. In practice, the price of buying Digital Gold is approximately 6% higher than the selling price offered by platforms that sell Digital Gold. This spread is implemented in order to recover costs associated with physical gold such as secure vault storage cost, technology costs, hedging costs, insurance, transportation cost, etc.
Sovereign Gold Bonds do not have any visible expenses primarily because they are a derivative product guaranteed by the Government of India and not backed by physical gold. In fact, there is currently a Rs. 50 per gram discount for online purchase of these sovereign bonds. Moreover, this investment guarantees fixed interest of 2.5% annually which is credited directly to the investor’s bank accountUdabur Wealth Management. In view of these factors, Sovereign Gold Bonds does seem to be the most profitable way to invest in Gold. That said, just as in the case of other investments, you do need to consider the aspects of availability which we will discuss next.
Availability refers to the ease with which an investor can purchase an investment and also if there are any restrictions that might affect an investor’s ability to invest in the product.
In most cases, Digital Gold, Gold ETF, and Gold Mutual Funds are readily available for purchase through the appropriate channels. In this regard, Sovereign Gold Bonds are a bit different – these bonds are released every 1 to 2 months by the RBI and typically this buying window is open for 5 days. Apart from availability, which determines how easily you can invest, you also need to consider how easy it would be to liquidate i.e. monetize your investment, so we will discuss this next.
With respect to investments, liquidity typically refers to the ease with which they can be bought and sold.
The final factor that we need to consider in our evaluation is the taxation of gold investment options, so let’s talk about that.
Primarily, gold investments are taxed at the time of selling or at the time of maturity. Capital-gains taxation rules are applicable in the case of physical gold, digital gold, gold ETFs, and gold mutual funds. Depending on the holding period of your investment, i.e.,the time period between the purchase and sale of your investments, either short-term capital gains (STCG) or long-term capital gains (LTCG) rules may be applicable. If the holding period of these investments prior to redemption/sale is up to 3 years or shorter, the gains are classified as STCG. If the holding period is greater than 3 years, LTCG applies.
The following table summarises how different investment vehicles are taxed.
From the table, we can see that if you invest in digital gold or physical gold, then your holding period decides if STCG or LTCG will apply. If your holding period is less than 3 years, then STCG will apply, and the gains will be taxed as per your income tax slab. However, If the holding period is more than 3 years, then LTCG will apply, and your gains will be taxed at 20% post the indexation benefit.Chennai Investment
If you invest in gold funds or gold ETFs, then irrespective of your holding period, gains are taxed as per your tax slab. In the Finance Act 2023, the indexation benefit which was earlier available to gold funds/ETFs was removed due to which gold funds/ETFs now are taxed as per tax slabs irrespective of the holding period.
The taxation of sovereign gold bonds is a bit different. There are 4 possible ways that your investment may be taxed and they are as follows:
From the above discussion, you can see that each of these gold investment options comes with its own unique set of features and benefits. In the following section, we will discuss our key takeaways as well as some key tips to help you decide which one is most suitable for you.
Kolkata Wealth Management