Whenever a discussion on investment comes into the picture, Gold is one of the most favorite asset classes of Indians. According to data, India reserves 11% of the world’s gold. Frequently, most of my investors ask me about gold investment. How can we invest in Gold? Is there any other way apart from buying physical gold through which one can invest in gold? What are the tax implications for different ways of gold investment? What are the advantages and disadvantages of different gold investments? Which way is more beneficial for the retail investor? So many questions like these are asked by many investors most of the time. Let us understand in depth what are the different ways to invest in Gold along with their pros and cons.
Gold has been a proven wealth creator for a long time. It has a history of almost 3000 years. Whatever the situation, gold always helps to create value for the investor. It is one of those asset classes which everyone should have in their portfolio. Because Gold is a king of good times as well as a king of bad times. When one has a good time gold helps to reflect his life status or when there is a bad time, it helps to stabilize the life due to its easy liquidity. Let’s understand it in detail.
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Physical Gold:
It is one of the traditional ways to invest in gold. Jewelry is a very easy way for people to start investing in gold. It has an emotional connection with the buyer. If one has jewelry, coins, or biscuits of gold at home then it creates confidence for the investor to face a bad situation. Also, in India, we have a culture of buying gold on auspicious days like Dhanteras or Akshay Tritiya, etc. Somehow this is the enhancing factor for Indians to invest in physical gold or jewelry. If someone wants to wear it for day-to-day life or wearing it in social gatherings as a status symbol then jewelry or physical gold is a good option for them. For tax purposes, gold coins, bars, and jewelry become a long-term capital asset if held for 36 months or more.
But physical gold or jewelry also has some challenges. Purity is one of the challenges when buying physical gold. If one is buying gold from their family jeweler or hallmarked shop then they are focusing on more purity but in other cases, it is on question mark. The second challenge that comes with physical gold is its safety. If you buy jewelry then you need to hire a locker in a bank for its safety or keep it in a safe place at home. Making charges is another issue in buying physical jewelry. One has to pay making charges at the time of buying and selling of gold jewelry. Making charges are not applicable if someone is buying gold bars, coins, or biscuits. One more challenge in buying physical gold is GST. If you buy physical gold then you have to pay 3% GST on it, which increases the overall cost of jewelry. If you want gold for regular use then go for physical gold but if you are looking for it as an investment tool then go with other ways of gold investments.
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Gold ETF:
Gold ETF is a way to invest in gold digitally. ETF stands for Exchange Traded Fund and gold ETF means an exchange-traded fund that buys and sells gold. It is traded as per gold price. If gold prices rise your gold ETF value also increases and vice-versa. For investment in Gold ETF demat account is mandatory for the investor. From the perspective of liquidity and safety, it is a good investment option. You can buy or sell it any time on open market days. The purity of Gold ETF is also high. There is short-term capital gain and long-term capital gain as per the holding period for Gold ETF bought till 31 March 2023. Since 1 April 2023, gold ETFs have been taxed as short-term capital gain irrespective of the holding period.
If we look at the disadvantages of Gold ETF then there are mainly three disadvantages. If someone does not have a Demat account then he cannot invest in it, One has to pay 3% GST while buying Gold ETF, and third, if you want to hold it physically then it’s not possible in gold ETF.
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Digital Gold:
Digital gold is a way to invest in gold digitally just like we do other digital payments, like UPIs, wallet payments, etc. Considering the advantages of digital gold, purity is guaranteed, liquidity is high, and one need not have any storage place like a locker for its safety. The most beneficial thing about digital gold is you can start investing at a very low cost as low as Rs 100.
Considering the cons of digital gold, again investors have to pay GST on the buying price which increases its cost. Apart from that, many other charges are included, like insurance charges, custodian charges, etc. Therefore, if you buy it and want to sell it on the same day after a few hours then there may be a huge price gap. It is recommended that, if you invest in small quantities just to inculcate saving habits then this option is good. But, if you want to invest for the short term, then you will always see a major gap in buying and selling prices which may be around 5-6%. Also, the custodian part of these platforms is internal and may be subject to risk. They need better regulations for custody and the safety of investment. The taxation of digital gold is the same as Gold ETF.
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Gold Mutual Funds:
There are so many gold mutual funds available in the market for investment. These mutual funds will invest predominantly in gold or only gold. So as the rate of gold increases the value of these funds will increase. You will not be buying it at the rate of gold, you will be buying it at the rate of mutual funds which is generally known as NAV which is net asset value. As the price of gold increases or decreases, it also reflects on these gold funds. In Gold mutual funds, one can start investing at a very low cost, as low as Rs 100. One can invest in these funds in a lump sum or through SIP i.e. Systematic Investment Plan mode. A Demat account is not mandatory to invest in these gold mutual funds. If someone wants to invest in gold with small savings this is one of the best options to invest.
Considering challenges, one cannot hold gold in physical form as this is the digital way to invest in gold. Taxation of gold mutual funds is the same as Gold ETF and Digital Gold.
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Sovereign Gold Bond:
According to me, this is the best investment option while considering retail investors primarily.
This gold investment is backboned by the Indian Government. The government issues sovereign gold bonds generally in three to six months. As it is backed up by the Indian government, it is extremely secure. The best part of this gold investment is it gives 2.5% interest p.a. to the investor on his investment amount which is credited to the investor’s bank account semi-annually. This benefit is not available in any other gold investments, where the minimum one-gram purchase is mandatory for investors. Investors can buy these bonds in physical as well as in demat mode. If an investor purchases these bonds through a demat account then he is eligible for a discount of Rs 50 per gram. If we look at the advantages of these bonds, then there are many advantages for retail investors in this. Bonds purchased by the investor are in electronic form so the investor does not require any storage facility to keep these bonds. There are no extra charges like GST, storage charges, custodian charges, etc. Therefore it is very cost-effective in that manner too. These bonds are issued for 8 years. And the maturity of these bonds is tax-free. This is the greatest advantage for investors. Even if any investor holds these bonds for at least 5 years then also he will not be required to pay any capital gain tax on the sale of it. According to me, this is one of the best options to invest in gold.
If you want to invest in Sovereign Gold Bonds, then the second series of SGB for the financial year 2023-24 opens today for the investor. These bonds are available for investment till 15 September 2023.
I hope you get clarity on the different ways available for gold investment. If you have any questions you can ask me in the comment box.
Happy Investing!