Your Guide to Investing in Gold

Know the Smart Way to Invest in Gold

Gold is a classic safe-haven asset. It performs only in times when investment in other asset classes, including equity, gets risky. You should look at gold as an inflationary hedge and put only 10 percent of your total portfolio.

Physical Gold: Traditionally, gold has been held in the form of jewellery, coins, and bars. Investing in the yellow metal in the physical form as coins or jewellery is not recommended. One, there is no guarantee on purity, as even today many jewellers in the unorganized market sell gold that is not hallmarked, and you also shell out additionally on making charges. Secondly, possessing gold in the form of jewellery has its own concerns about storage, security and outdated designs, which the children may or may not like. Thirdly at the time of re-sale, when you want to encash on the rally in the gold price, you again lose value as the jeweller will deduct wastage charges. This can be as high as 25% of the price of gold.

For those who would still want to buy gold coins, there's still an option. Instead of making Indians buy the imported coins, the government has launched ingeniously minted coins which will have the National Emblem of Ashok Chakra engraved on one side and Mahatma Gandhi on the other side. The government has launched the sale of BIS-hallmarked gold coins weighing 5gm and 10gm and gold bars of 20gm of 24 karat purity through Metals and Minerals Trading Corporation of India Ltd. (MMTC) outlets. The coins are available at MMTC outlets and designated banks. MMTC also offers the option to buy back ie MMTC will repurchase the Indian Gold Coin, in intact tamper-proof packaging and with original invoice, at the prevailing gold base rate.

Also read: Why a DEMAT account is a must for 21st Century Investor?

Sovereign Gold Bonds: Sovereign gold bonds are issued by the Reserve Bank of India (RBI) on behalf of the government. It was launched in November 2015 with the objective of reducing demand for physical gold and shifts a part of the domestic savings that had gone into the purchase of the yellow metal into financial savings.

1.  Issue Price: The bonds purchased are stored in your DEMAT account online. The bonds are denominated in multiples of 1gm of gold. The issue price of the bonds is fixed at the simple average of the closing price of gold of 999 purity, or 24 karat gold, on the last three working days of the week immediately preceding the subscription period.

2.     Interest Rate:  2.50 % per annum and gets credited semi-annually to the investor’s bank account.

3.    No GST & Making Charges: Buying physical gold needs you to pay making charges over and above the price of gold. Above this, you pay 3% GST for the value of gold, and 5% GST on making charges. This significantly inflates the purchase costs, taking some sheen off the metal. The Sovereign Gold Bond, on the other hand, has no GST on the investment and since the gold is dematerialized, there are no making charges as well. It is a Central government-backed investment scheme, and it allows you to own 24K gold virtually.

4.    Subscription Limit: The minimum investment limit for these bonds is one gram with a maximum limit of subscription of 500 gm per person per financial year (April-March). The maximum limit of subscription is 4 kg for an individual and Hindu undivided family (HUF) and 20 kg for trusts and similar entities per financial year.

5.  Who Can Invest in Them: The sale of the bonds is restricted to resident Indian entities including individuals, HUFs, trusts, universities and charitable institutions.

6.    Exit Option: The tenure of the bond is eight years with exit option from the fifth year from the date of issue on every interest payment date.

7.   Redemption Price: Redemption of SGBs takes place at the prevailing gold price based on the previous week’s simple average of the closing price of gold. The investor receives the value of the bond plus capital appreciation or depreciation from the increase or decrease in gold price.

8.     Liquidity: The bonds are listed on NSE and BSE and investors can buy and sell the bonds on the stock exchange after the subscription period is over at the current market price.

9.   Taxation: There is no capital gains tax on SGBs if held till maturity. However, if the bonds are sold before the maturity date through the exchanges, then this exemption is not applicable. If gold bonds are sold within three years of purchase, then it is considered short-term gain. Such gains, if any, will be clubbed with total income of the investor and taxed at the income-tax rates applicable to his income slab. On the other hand, long-term gains will be taxed at 20.80 percent (with indexation benefits).

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SGBs Vs ETFs: Sovereign gold bonds hold sovereign guarantee, hence there is no default risk is involved. In the case of gold ETF too, the credit risk is minimal. Investors have to bear the transaction charges if they want to trade in gold ETF, while there is no such charge involved with SGB if they don’t exit through the exchanges. Further, gold ETFs deduct some charges in the name of TER (total expenses ratio) from total assets, which range from 0.99 to 1.2 percent per annum.

Gold ETFs and Funds: Mutual Funds offer exchange-traded funds (ETFs) that invest primarily in physical gold with each ETF unit typically representing 1gm of gold. The equivalent physical gold is held with the custodian bank and valued periodically, as per the Securities and Exchange Board of India’s (SEBI) guidelines. The performance of gold ETF is benchmarked against the domestic price. Ideally, the returns from the scheme should match that of the benchmark. But there may be variations on account of the cash holdings and the costs involved in managing an ETF. It could also be because gold ETFs are now permitted to hold financial instruments such as exchange-traded derivative contracts and the Gold Monetization Scheme.

1.    ETF investors must have a Trading and DEMAT account.

2.    Some fund houses offer a gold fund of funds (FoFs) wherein they invest the money from investors in gold ETFs. Here you can invest in gold through SIPs even with no Demat Account. 

3.    Such investment (buying and selling) happens on a stock exchange (NSE or BSE) with gold as the underlying asset. Therefore, it is absolutely safe.

4.    The transparency in pricing is the biggest advantage. The price at which it is bought is probably the closest to the actual gold prices and therefore the benchmark is the physical gold price.

5.    What's more, you may even buy or sell 1unit of Gold ETF with underlying asset of 1 or 0.5 grams of gold.

Even though there are no entry or exit charges in Gold ETF, there are possibly three costs in them.

1.    The expense ratio (for managing fund) which is generally low compared to other mutual funds and is around 1 percent.

2.    The broker cost that needs to be accounted for every time you buy or sell Gold ETF units.

3.    Tracking error which arises because of the fund's expenses and cash holdings thus not mirroring actual gold prices.

Digital Gold: This is a facility offered by MMTC-PAMP Pvt. Ltd., a joint venture between MMTC Ltd. and Switzerland-based bullion brand PAMP SA, to accumulate gold by buying online through institutions, broking houses and payment platforms such as Paytm, Stockholding Corporation of India Ltd (SHCIL), among others. The scheme allows investors to accumulate gold by

1.    It is a simple and transparent way to buy and sell gold instantly. Anyone who wants to invest in gold can do so online at their own convenience without DEMAT and trading account.

2.    Buying gold of value as low as ₹10.

3.    The accumulated gold is kept in secure storage in the custody of MMTC-PAMPL with full insurance and investors can ask for delivery in the form of coins of different denominations, the minimum delivery being 1gm.

4.   The gold will be kept in storage for a maximum period of five years within which period the investor has to take delivery.

Conclusion: Don’t buy gold as a strategic allocation to meet goals. Get clarity as to why you need to invest in gold- is it for marriage purpose or for pure investment. For investments, one should not have more than 10 percent of the total portfolio in gold.  The returns are extremely volatile and you may find that your investments are in the red when you have to exit. Buy gold for some stability as it protects you against inflation and economic uncertainty. Sovereign gold bonds are suitable for investors who may not need the funds in the short term. For investors who need liquidity, consider gold ETFs and funds.