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3 Different Ways to Invest in Gold in India : Exploring Gold as an Investment Diversifier

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Indians feel a special connection with Gold. It’s usage is not only limited to Jewellery but gold is often used to bring diversification in investments. Purchase of gold is a symbol of good luck and hence demand of gold increases on auspicious occasions like Akshaya Tritiya, Deepawali, Dhanteras, etc. Owning gold is often believed to bring good fortune and prosperity for a family or business. In this article, we are going to discuss and analyze different ways to invest in gold in India. We will look into their pros/cons and finally end our research by providing a conclusion backed by facts and data. So, if you (are investing/want to invest) in gold, this article should provide you a clear path to diversify your finances.

Broadly, investment in gold can be classified into 2 categories :

⦁ Physical Gold
⦁ Paper Gold

Investment in physical gold includes jewellery, gold coins, gold bars/biscuits, etc. This form is most common among the middle class and needs no explanation. Physical gold can be easily bought from jewel stores, amazon, Flipkart, MMTC stores, etc. This form of gold does bring some complications:

⦁ Impure gold (<24 carats) often face the issue of depreciation.
⦁ Buying and selling is a hectic process.
⦁ You need a trusted source. Storage is also a problem.

Our ancestors mostly preferred physical form of gold for investment. But the trend is changing drastically. With the easy availability of the internet, investors have a number of options through which they can invest in paper gold. Most common ways include Gold ETFs, Gold Mutual Funds and Sovereign Gold Bonds.

We will go through them one by one, look at some the choices available, explore the way to invest in them and compare them on various fronts: tax benefits, historical returns, ease of investment, etc.

⦁ Gold Mutual Funds

Different Asset Management Companies offer Gold Mutual Funds through which one can invest indirectly in gold. If we look at top 2 Gold MFs based on Asset Under Management, Nippon India Gold Savings Fund has assets of 1020 crores, whereas HDFC Gold Fund has assets of 663 crores.

How to invest?

One can invest in gold mutual funds through any platform offering mutual funds like Zerodha Coin, Groww, etc.

Pros:

Simple to invest and redeem. One can set SIP (monthly/weekly) which will automatically invest in gold periodically.

Cons:

  1. Expense Ratio is close to 0.25% per year. Hence, the return will be 0.25% lesser than actual gold returns.
  2. Early Exit Charges: Most Gold Mutual Fund charges 1% if you want to redeem your investment within 1 year.

Returns:

HDFC Gold Fund has given 79.6% returns in the last 5 years.

The Problem:

Actual Return: Though people think that these funds mimic gold’s return, it’s not the case actually. Different gold funds give different return and it’s very hard to figure out why! Everyone assumes that Gold Mutual Funds only invest in gold, they don’t provide clear info on their holdings, so it becomes very tough to analyze their portfolio. Being said that, let’s go through some data to back this point.

IDBI Gold vs Gold PriceIf we look closely at the above chart of IDBI Gold Fund and Domestic price of gold, we notice that there is a big spike of around 18% during June 2020 in Gold Fund price whereas the actual price of gold has been same throughout. After that spike, the price comes back to normal. There will be thousands of people who have invested during that spike period and they are currently sitting at 15-18% loss even when currently gold is trading at its all-time high!

HDFC Gold vs Domestic GoldSame issue with HDFC Gold Fund (Spike during mid-April). This is the issue with all gold funds (I am not targeting a specific company). People often tend to miss these small details which often cost them 10-15%.

Taxation:

Short-term capital gains from these funds are added to your taxable income, while long-term capital gains are subject to either 10 per cent flat tax or 20 per cent after indexation.

⦁ GOLD ETFs

Gold Exchange Traded Funds (ETFs) are offered by different companies which allows us to directly invest in gold. Top gold ETFs are “Nippon India ETF Gold BeES”, “ICICI Pru Gold ETF”, HDFC Gold ETF”, etc.

How to invest?

These ETFs are traded on NSE/BSE during market hours. One can buy/sell regularly whenever they want through any broker.

Pros:

  1. No lock-in period.
  2. Buy/Sell whenever you want.
  3. Easy to invest and redeem.

Returns:

Nippon India ETF Gold BeEs has given 81% returns in the last 5 years (slightly higher returns than gold fund: no expense ratio)

Taxation:

Same as Gold Funds

 

⦁ Sovereign Gold Bonds (SGBs)

This is the least popular yet best way to invest in gold for the long term. SGB is issued by RBI to fund their expenses. The issue date is published by RBI. The date of subscription and issuance can be found here: https://tradingqna.com/t/upcoming-sovereign-gold-bond-issues/48989

How to invest:

You can subscribe SGB through banks/Demat accounts/post offices. I use Zerodha to buy SGB. The official Zerodha link is: https://zerodha.com/gold

Features:

One can buy 1 gm to 4 kg of Gold per issue.
Maturity period is 8 years. But one can redeem the bond after completion of 5 years. If redeemed after 5 years, capital gains are fully exempted. On redemption, you will get the value of gold as per gold’s price.
There is an option of early exit (redemption before 5 years). But you will have to pay taxes on capital gains if u exit prematurely. Early exit can be made by selling those bonds through Demat account on NSE. These bonds are traded on NSE/BSE.

Pros:

  1. The government pays 2.5% per annum of interest on your invested value into your bank account: You earn an extra 2.5% every year along with gold’s appreciation profit.
  2. Very easy to invest.
  3. Government Bond: Sovereign guarantee
  4. No capital gains if held for more than 5 years.
  5. Net returns are higher than actual gold returns.
  6. Loan against SGB is also available.

Returns:

SGB has given 98.4% in the last 5 years

CONCLUSION

We looked at different ways of investing in gold. The cost of owning physical gold can go high (storage cost, depreciation in case of < 24-carat gold). Paper gold is a better alternative when you are planning to invest for a long period. The risk of owning, holding and storing doesn’t exist in paper gold. Among all, SGB tends to give better returns than other forms of gold investments. If held for more than 5 years, capital gains from SGB are also tax-exempt.

What Should You Chose?

I would prefer investment in SGB anytime due to tax exemption on capital gains as well as juicy 2.5% per annum extra returns. What are your thoughts?