Modes of Investment in Gold

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Different modes of investment in gold are available in the market and every mode has its own pros and cons. The best mode can be selected considering your objective of investment in gold. In this article we will make you go through the different modes of investment in gold and its pros and cons.

Different modes of investment in Gold are:

  • Gold Bullion/ Biscuits/ Coins and Jewelry
  • E-Gold or purchase of gold through commodity exchange in demat form
  • Gold jewelry schemes with jewelers
  • Gold ETF
  • Gold Mutual Fund or Gold Fund
  • Sovereign gold bonds (Central Government)

Lets discuss these one by one:

  1. Gold Bullion/ Biscuits/ Coins and Jewelry

    • This is the most common form of holding gold in India. In addition to that, it is also the most convenient form for semi-urban and rural population as they do not have an easy access to the web platform and the majority of that demographic isn’t tech savvy enough to invest through electronic forms.
    • Pros:

      • Easy Availability
        Gold coins or biscuits can be bought through authorized vendors, gold shops and banks. Gold jewelry can be easily bought from jewelers in your locality. There is no requirement of a demat account or any registration hassle in this mode of investment.
      • Liquidity
        Physical gold can be easily sold in the market with jewelers which makes it a highly liquid investment. Besides that, gold loan is also available for people who need short term finance.
    • Cons:

      • Making and wastage charges
        While buying, jewelers levy making and wastage charges on sale of physical gold. These charges are unrecoverable as while selling gold only its weight and current market rate is considered.
      • Purity of gold
        The vendors chosen to buy gold from should be trustworthy as many instances where there was frauds in terms of the purity percentage guaranteed have come to light. To counter the same, government has come up with the concept of “hallmark” stamp which guarantees the purity. If in doubt, there are government accredited testing labs where the purity can be ascertained.
      • Click here to know more on other things you need to be aware of before buying gold jewelry the next time.
  2. E-Gold or purchase of gold through commodity exchange in demat form

    • This is the electronic mode of investing in gold and can be easily converted into equivalent physical gold at any point of the time. You have to open a Demat account to start investing through this approach. Trading happens through National Spot Exchange (NSEL) platform, where each e-gold unit corresponds to 1 gram of physical gold.
    • Pros

      • The advantage of gold investment through this mode is that it does away with the holding and storage cost.
    • Cons

      • There is sundry cost involved in terms of brokerage, Demat account charges and other transaction costs. This cost is nominal as compared to making or wastage charges levied on physical gold.
  3. Gold jewelry schemes with jewelers 

    • Primarily, there are two types of schemes that are being offered under gold jewelry schemes. The first one is where in you put a fixed amount every month in a particular scheme and when your tenure ends you can opt for a jewelry matching the amount you invested in. In the second type of scheme, your monthly installment gets invested in gold from the very first day under prices that are prevailing and when your tenure ends you can convert the same into an ornament.
    • Pros

      • Saving for marriage
        Helps in saving money for buying gold for marriage and occasions.
      • Better return than fixed deposit
        When you go for the first scheme, the jeweler pays one installment at the end of tenure as bonus while you end up paying only 11 installments. So by opting under this scheme you earn approximately 12-15 percent interest compounded annually.
    • Cons

      • No flexibility
        The amount invested can be only converted into gold ornaments.
      • Lose bargaining power
        Since the jewelers get the money in advance and you buy gold later, you lose your bargaining power in making and wastage charges.
  4. Gold ETF

    • Gold ETFs are funds that invest in physical gold of 99.5 per cent purity. A gold ETF invests 90-100 per cent in physical gold sourced from the RBI approved banks and 0-10 per cent in debt instruments. It is for this reason that Gold ETF returns are mostly in line with the prices of physical gold.
    • Pros

      • Liquidity
        The units of gold ETFs are traded in exchanges and hence offer liquidity and the right price for both buyers and sellers.
      • Small Lot size
        The minimum that you can buy in ETFs, is gold worth at least one unit, which is equivalent to one gram of physical gold.
    • Cons

      • It involves annual expenses of about 1% of total investment.
      • SIP route of investment is not available in case of Gold ETF.
  5. Gold Mutual Fund or Gold Fund

    • A gold fund is an open-ended mutual fund that invests in a gold ETF. For an investor, buying a gold fund is easier because you don’t need a demat account, which is required to invest in a gold ETF.
    • Pros:

      • Investors in gold funds can invest through the SIP route unlike gold ETF.
    • Cons:

      • Annual expenses of about 1.5% of the asset under management, whereas it is around 1% in case of gold ETFs.
  6. Sovereign Gold Bonds (SGBs)

    • SGBs are government securities denominated in grams of gold. They are substitutes for holding physical gold. Investors have to pay the issue price in cash and the bonds will be redeemed in cash on maturity. The Bond is issued by Reserve Bank on behalf of Government of India.
    • Pros:

      • Fixed interest income:
        The Bonds bear interest at the rate of 2.50 per cent (fixed rate) per annum on the amount of initial investment. Interest will be credited semi-annually to the bank account of the investor and the last interest will be payable on maturity along with the principal.
      • Small lot size:
        The Bonds are issued in denominations of one gram of gold and in multiples thereof. Minimum investment in the Bond shall be one gram with a maximum limit of subscription of 4 kg for individuals, 4 kg for Hindu Undivided Family (HUF) and 20 kg for trusts and similar entities notified by the government from time to time per fiscal year (April – March). In case of joint holding, the limit applies to the first applicant.
      • Special discount:
        A customer can apply online through the website of the listed scheduled commercial banks. The issue price of the Gold Bonds will be ₹ 50 per gram less than the nominal value to those investors applying online and the payment against the application is made through digital mode.
      • Liquidity – Traded on exchanges
        Though the tenor of the bond is 8 years, the bond will be tradable on Exchanges, if held in demat form. It can also be transferred to any other eligible investor which makes it highly liquid.
      • Income Tax Exemption
        Interest on the Bonds will be taxable. However, the capital gains tax arising on redemption of SGB to an individual has been exempted. The indexation benefits will be provided to long terms capital gains arising to any person on transfer of bond. However, capital gain on sale of bonds on exchange before redemption will be taxable.
      • Collateral:
        Bonds can be used as collateral for loans. The loan-to-value (LTV) ratio is to be set equal to ordinary gold loan mandated by the Reserve Bank of India (RBI) from time to time.
    • Cons:

      • Cannot be converted in physical gold

Conclusion:

In case your objective is to utilize gold in occasions like marriage of your children within next one or two years than it is preferable to buy gold physically or opt for gold jewelry schemes with a trusted jeweler.
However, if you want to buy gold only for investment purpose then the best way to that is by purchasing sovereign gold bonds.

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Author:
Sahil Goel | LinkedIn