As an Indian, the fascination with gold is such that more than 75% of Indian households invest in gold in some form or another, and the majority of this gold is consumed by middle-income groups, those with annual household earnings of 7 to 10 lacs. In 2021, the consumption of this yellow metal stood at 797 metric tons, with weddings being one of the most prominent reasons driving mass consumption, accounting for 43% of purchases. I am sure the demand for it will witness a significant uptick in the coming days.
This yellow metal is so deeply ingrained in Indian culture that it shines in almost every celebration. We Indians are smitten by its glitter. Globally, the majority of it is used for jewelry, followed by the reserves held by various central banks across the globe, with the remainder used for investment and industrial purposes. If we look at the historical data, on average, gold has generated a 9–10% annual return for an investment period of 10 years.
Let us now evaluate the ways of investing in gold:
Depending on your preferences, you can invest in gold in both physical and digital forms. As an investment, it can be held in the form of jewelry, coins, bars, i.e., bullion, and so on. However, there are a few significant drawbacks to investing in physical metal, such as:
- Making or designing charges that make purchases expensive.
- Due to security and insurance requirements, storage charges will apply.
- Due to the possibility of impurities and the requirement of origination and purity certificates, selling is inconvenient.
To overcome the limitations of buying physical gold, you can always go digital with investments like Digital Gold, Gold ETFs, Gold Mutual Funds, and Sovereign Gold Bonds.
Each of these investment options is briefly described below:
- Digital Gold: These can be purchased in denominations ranging from 1 g and higher through various apps.
- Gold ETFs: Gold Exchange Traded Funds are traded on stock exchanges in the same way that shares are, and their primary underlying assets are Physical Gold and stocks of gold mining/refining companies. Investing in gold ETFs requires a Demat (Dematerialized) Account.
- Gold Mutual Funds: These are mutual funds operated by various asset management companies (AMCs) and invest primarily in Gold ETFs. The MyGoalMySip app allows you to invest in the majority of Gold Mutual Funds.
- Sovereign Gold Bonds: The Reserve Bank of India (RBI) issues these bonds regularly, and they are available for purchase from leading public and private sector banks. While the returns are pegged to the price of gold and assured by the GOI, physical gold is not an underlying asset.
It’s important to keep in mind that, even though the performance of all the examples of gold investments mentioned above is correlated with gold’s price, there are important differences among them in terms of risk, returns, availability, liquidity, lock-in period, and taxation. Let us begin with risk and move on to other aspects of gold investment options.
| Physical Gold | Digital Gold | ETF | Mutual Fund | Sovereign Gold Bond | |
| Minimum Investment | Rs. 5,500/- considering the price of 10g 24K Gold to be approx. 51,000/- | Starting at Rs. 1 | Rs. 5,000/- | Rs. 100 | Rs. 5,000/- |
| Returns & Cost | Lower the making cost higher the return + 3% GST + insurance cost (3-4%) | 3 % GST + 6% Spread (difference in the buying and selling price for the investor.) | Total costs of 0.5% to 1% annually inclusive of Expense Ratio, Demat Account Charges, Brokerage | Total costs of 0.6% to 1.20% annually which include:0.5% to 1% as Gold ETFs + (0.1% to 0.2% for managing the Gold) | No visible expenses |
| Availability | Physical Store. | Online apps. | Online apps. | Online apps. | Released by the RBI periodically, usually at intervals of 1-2 months and the buying window is open for 5 days at a time. |
| Liquidity | Can be sold anytime. | Can be redeemed anytime. | Can be redeemed anytime. | Can be redeemed anytime. | SGB currently has a maturity period of 8 years. |
| Risk | Theft, purity issues, and loss during manufacturing. | Lack of regulatory oversight. | Market risk is related to the volatility of gold prices. | Market risk is related to the volatility of gold prices. | Sovereign default – Highly unlikely the GOI will be unable to repay |
| Taxation | LTCG or STCG depending on the period of holding, if sold after 3 years gains will be taxed @20% after providing for indexation before 3 years gains are taxed as per the applicable income tax slab rate. | Interest: As per applicable IT slabs.Redemption on maturity or premature redemption: Tax-freeSold on Stock Exchange: LTCG or STCG |
Conclusion:
Which investment option is best for you will depend on how long you plan to hold it. SGM is the best option if you can lock up your funds for 5-8 years. If you want to invest for less than three years, ETFs and gold mutual funds are good choices. Due to its high cost and inherent risks, gold can also be completely avoided as an investment.
Writer: CA Suraj Kar
For more information, reach us at support@mygoalmysip
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