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Investing In Gold, Physical Gold vs Digital Gold, Gold Bonds, Gold ETFs, Sovereign Gold Bonds

Gold is an unavoidable family member of every Indian’s household. Traditionally, the gold purchase is driven by sentiment, not logic or calculation as liquidation is easy on gold. But things are changing, Out of all precious metals, Gold is given more importance when it comes to investing. Investing in Gold is considered to be one of the safest and rewarding forms of investment.  Most people invest in gold to balance their portfolio with a less risky asset class. We have seen that during the pandemic how stock markets all over the world have broken into pieces, in fact, the world economy has shaken and lost its rhythm. But the price of gold stood tall and never lost its value but it got appreciated. After seeing this the world has realized this precious metal should be a part of everyone’s portfolio with an adequate weightage not only because of its sturdiness but also for its appreciation potential. This could be easily understood from a change in the punchline, mentality, ads, and campaign by the famous Indian jewellery conglomerates putting more focus on gold as an investment replacing showoff as jewelry. Considering all these developments let me explain about investing in gold and how people are manipulated by these kinds of advertisements. There is no need to explain much about Gold, as that precious yellow metal has been part of our lives, history, traditions, culture since long, so let’s directly jump into the topic of making intelligent investments in Gold. What are the different ways to invest in gold? Let’s discuss it and revolutionize the conventional gold investment methodologies of purchasing and keeping it as jewelry.

Buying gold jewellery as an investment opportunity is not at all a good idea. Why? All of us are aware about the considerable Percentage of making charges that we need to pay while purchasing gold as Jewelry ornaments and even GST on top of that often makes Purchasing of Gold more expensive than what we thought and drains our wallet. Making charges are irrecoverable on resale of the Jewelry we bought. Another concern is the purity of the metal and we have to blindly believe the merchant with the purity even though Standards exist to ensure the quality of it. Being a physical asset, the chances of it being lost or stolen are much higher, so storing it safely is also a cause of worry. So most people keep their jewels in Bank Lockers paying additional charges for its safekeeping.

Considering all these factors one can easily say investing in gold in the form of jewellery is not at all an expert decision in fact, to an extent it could be a wealth depreciating decision. Investment in gold should always be in such a way it would be pure and unlock its purity value in the future.

So what are the alternatives in gold investments compared to jewellery?

  1. Physical Gold of 24 Carat
  2. Digital Gold
  3. Gold ETF
  4. Gold Mutual Fund
  5. Sovereign Gold Bonds

Yes we know you are surprised seeing these many options, let’s discuss them one by one in detail.

Physical gold

It is nothing but buying gold from banks or jewelleries in the form of gold coins or gold biscuits or bars in the most purest form as 24 Carat Gold. The most standardized way of directly owning physical gold is by acquiring bullion bars. Be sure you are doing business with a reputable dealer and check the bars’ purity, form, size, and weight before purchasing. Like making charges, gold coins and bars come with processing charges, which are again irrecoverable. One major disadvantage of Physical gold is 3 percent GST on purchase which results in direct depreciation of 3% on returns. Considering the last five years, data Gold price has grown at the rate of 8 percent CAGR, i.e 40% returns over a period of 5 years. There is no maturity period on physical gold and you can hold it for unlimited years and an advantage of it is you can keep it as collateral for taking loans.

Digital gold

Another option is Digital gold and as the name suggests I believe you might have seen this investment option in different digital platforms like Google Pay, Phone Pay, Paytm, Kuvera, etc. These options are very lucrative considering the century we live in. The purity of digital gold is 99.99 percent. The three Organizations which control the digital gold business in India are MMTC-PAMP, Augmont’s, and  Safegold. They guarantee the utmost purity and safety for gold purchase which are not even offered by giant jewellers or any other conventional players. Another advantage is the safety, their promise is 100 percent secure walls plus a delivery option according to our convenience. So digital gold could be considered as an intelligent alternative to physical gold. One major disadvantage of Digital gold is 3 percent GST on purchase which results in direct depreciation of 3% on returns. The previous five years returns are 40 % excluding GST. The maturity period is 5-7 years within which either you have to take delivery or sell it. We may not be able to submit proofs of digital gold as collateral for any kinds of loans. But an additional advantage of Digital Gold is that we can purchase it for even small amounts as low as Rs.100 or a similar amount set by the Digital Platforms and could take partial or complete delivery in multiples of grams.

Gold ETFs

Gold ETFs or exchange-traded funds. We have learned about mutual funds and ETFs from our previous articles and this works the same way. A fund manager will be there who invests the pool of money into physical gold, gold mining companies, and some in governments debt instruments like bonds. One special advantage of an ETF is that there is no GST payable on the purchase of Gold ETF. But as we know Fund Houses will charge a certain percentage of Fee for Fund Management and An expense ratio of 0.5-1% is usually charged on ETFs by most of the Fund Houses. Also, we need a Demat account to buy and keep gold ETFs. The previous five years returns are 35 percent including brokerage and other charges. The tenure of keeping an ETF is unlimited and the collateral option to avail loans is unavailable. Some of the best performing ETFs are Nippon Gold ETF, SBI Gold Fund, Aditya Birla Sun Life Gold ETF, Invesco India Gold ETF, HDFC Gold ETF and we could Trade it any time on the Secondary Market.

Gold Mutual funds

Gold Mutual funds are the same like other mutual funds but they invest their money into gold ETFs and other gold related securities. One added advantage of a Gold Mutual fund is there is no GST payable on it. An expense ratio of 0.5 to 1.5% is charged on mutual funds in addition to ETF charges. A major drawback of mutual funds is the exit load which is about 1% – 2%, If we exit the fund before one year. The previous five years effective returns are 30 percent considering all charges.Tenure of keeping an ETF is unlimited and the collateral option is unavailable. 

Sovereign Gold Bonds

Sovereign Gold Bonds are bonds issued by the Reserve bank of India (RBI) on behalf of the government of india. The bonds are sold in lots of 1g and only during specific time periods predefined by RBI. There are many advantages of opting for sovereign gold bonds over other methodologies. First of all, we will get it at a discounted rate from RBI compared to purchasing it from shops. As we are getting it as a bond there is no making charges or any other charges. The purity of it is the topmost and after the maturity period RBI will buy it from us that’s guaranteed.

We’ll get a 2.5 percentage yearly interest on the total amount of investment by choosing sovereign gold bonds. The previous five years effective returns are 52 percent i.e 40% returns on underlying + 12.5 % (2.5*5) considering all charges. The maturity period of sovereign gold bonds is 8 years and after eight years capital gains are completely tax-free. We have an option to sell it after 5 Years, in that case the Capital Gains will be taxable. The interest income is taxed as per individual tax slab and the Loan option is available if we go with sovereign gold bonds. Also, one additional feature of the Sovereign Gold Bond is that they can be traded in the Secondary market as well, which offers good liquidity to it.

How to buy SGB?

Who can buy SGB? How to buy SGB? Anyone, a person or a trust or a company can buy sovereign gold bonds and a minimum of 1 gram should be bought. An individual can buy a maximum of 4 KG and a trust or a company can buy up to 20 KG. We can get it from various banks, post offices, RBI websites during the selling window or through stockbrokers.

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