Gold Investment In India

Gold has remained one of India’s most preferred modes of investment for a long time. This is part because gold investments retain their value and even grow during periods of economic uncertainty. Additionally, gold investments in India can provide you protection against inflation and can be a good portfolio diversifier.

With a plethora of options available today, gold investment in India is not just limited to buying gold in its physical form. In this article, let us understand key details about gold investment in India, including taxation and things to consider before investing.

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Why Invest in Gold?

Gold investment in India can be the ideal investment option for risk-averse investors. The most significant advantage of investing in gold is that it has little correlation with other types of assets. Hence, it can act as a buffer to your volatile portfolio.

Here are some reasons why gold investment in India can be beneficial: -

Helps Beat Inflation

No matter how smart you work, you can never escape inflation. Gold is perhaps the only option that retains its value and helps beat inflation. This is because the value of gold increases with the cost of living and often reaches its highest during high inflation periods.

Portfolio Diversification

Diversification of your investment portfolio is essential as it helps balance out the risk. The value of gold is inversely proportional to the traditional investment options such as stocks. This way, gold investment in India can act as a safety net against the volatility of markets.

Supply and Demand

Since gold is a natural resource, there is only a limited supply of this precious metal. It means that there will always be a demand for it. And the rising demand will raise its prices in the market, thereby making a gold investment in India an excellent option. The demand for gold is especially high in a country like India, where it is considered auspicious, and no celebration is complete without it.

Liquidity

Gold is extremely liquid and offers investors an option to trade it during an emergency or when they need cash. The constant demand for this precious metal ensures that it is easy to sell during the most testing times.

Helps Balance Currency Devaluation

Uncertainties in the financial markets can lead to the strongest of currencies losing their value. Unlike currencies, gold is an asset that cannot be reproduced with a machine. Therefore, gold investment in India can protect investors from currency devaluation.

Crisis Commodity

Gold is sometimes referred to as the ‘crisis commodity’ due to its ability to retain its value in the worst of times. Gold can survive both geopolitical and financial uncertainties, and that is why most countries have huge reserves of gold to combat any situation.

Easy to Own

Buying gold is no longer a tedious task as you can invest in it through different mediums. Gold investment in India can be made through physical gold, E-gold, gold funds, Exchange Traded Funds (ETFs), etc. The different options give investors the flexibility and ease of owning gold.

Returns

The history of gold shows that this precious metal can beat inflation. Regardless of the situation of the market, gold has always seen a rise. Gold investment in India has always brought returns.

Options Available to Invest in Gold

The traditional way to invest in gold is to buy physical gold in the form of coins, jewellery, or ornaments. However, there are some new forms of gold investment in India, which are equivalent to buying physical gold but without the hassles of going to a store. Let us talk about the most popular ways to invest in gold today:

1. Investment in Physical gold

This includes simply making a direct investment in physical gold. Physical gold can be easily sold in the future at a higher value. However, a few downsides of it is the making charges, storage hassle and increased risk of theft.

2. Gold ETFs (Exchange Traded Funds)

Gold ETFs are the units that are a dematerialised or paper representation of physical gold. It is similar to making a direct investment, but here the investor can buy proportionate ownership in a collective vault instead of buying gold in the physical form. 1 gold ETF is proportionate to 1 g of gold.

3. Gold Mutual Funds

Gold Mutual Funds is another way that liberates investors from the obligation of buying and storing physical gold. Gold mutual funds where the investor makes the investment not in the gold but in the gold mining companies.

4. Gold Schemes

Most jewellers across India offer gold schemes to ease purchasing of gold. Gold schemes vary jeweller to jeweller; however most of them work through regular investments. The investor needs to invest a defined amount for a defined time to generate a significant amount that can be used to buy gold.

5. Digital Gold

Digital gold is an investment option that is growing popular by the day. As the name suggests, digital gold works like any digital payment option wherein investors can buy or sell gold through fintech platforms.

6. Sovereign Gold Bonds

Sovereign Gold Bonds is a gold investment option introduced by the Reserve Bank of India. As the name gives away, gold bonds are securities that are traded in the form of gold. Investors have the options to buy the bonds in digital, physical or dematerialized format.

The following table displays the key differences between these three types of gold investment in India: -

Physical GoldGold ETFs (Gold Exchange Traded Funds)Gold Mutual Funds
No [2] Demat account is required for this type of gold investment in Indiaa demat account is needed to invest in Gold ETFs.no need for an investor to have a demat account.
The prices of gold may increase with rising inflation.Any changes in the price of gold directly affect the prices of Gold ETFs.Change in gold prices does not directly affect the Gold mutual funds.
There is no investment charge involved if you buy gold as jewelleryInvesting in Gold ETFs include asset management and brokerage charges.Management charges, entry and exit charges are applicable in the gold mutual funds.
The buyer will have to bear the risk of theftIn the case of Gold ETFs, the investor does not need to carry or store any physical gold. Hence, there’s no risk of theft.There is no risk of theft involved in Gold mutual funds
There is no paperwork involved in the trading of physical goldPaperwork is involved when you trade Gold ETFs.Gold mutual funds also require paperwork for trading.
Gold prices are not affected by fluctuations in the stock market.Gold ETFs are not affected by stock market fluctuations.Stock market fluctuations do affect the gold mutual funds.
There is no Systematic Investment [3] Plan(SIP) option availableThere is no SIP option.Gold mutual funds give the investor an option to invest through the SIP plan.
It is best suited for investors with conventional tastes.Gold ETFs are best suited for people who have a taste for intraday trading.Best suited for people who have a risk appetite and are interested in stock markets.

What are Gold Funds?

Gold funds are the newest form of gold investment in India, where you do not have to hold this precious asset in the physical form. They are open-ended funds that invest in units of Gold Exchange Traded Funds (ETF). The primary goal of gold funds is to create wealth by making use of the potential of gold as an asset. It is very convenient to invest in gold via gold funds instead of buying physical gold.

With gold funds, you can enjoy the benefits of professional fund management. Each gold fund is assigned a fund manager who takes the investment decisions as per the objective of the fund. The returns generated from a gold fund is similar to that of a gold ETF. Also, the Net Asset Value (NAV)[1] of the gold fund can be influenced by the price movements of gold in the market.

Gold Investment vs Mutual Funds

Gold investment in India holds sentimental value and has been used as a currency for years before paper money came into existence. Gold is a conventional source of investment that has the power to beat inflation because of its value. On the other hand, mutual funds [3] are a modern-day investment tool that pools the funds from small investors and puts them in stocks, bonds, and other assets. Mutual funds have grown in recent times due to their wide-ranging benefits such as portfolio diversification, varied options, compounding, etc.

Both investment options can be rewarding, but which one is more beneficial. Let us look at a comparative study of gold vs mutual funds to find out.

ParametersGoldMutual Funds
ReturnsGold investment in India provides consistent returns in the long run.Returns from mutual funds can vary with different plans. However, they offer similar returns as gold or even higher returns in some cases.
RiskGold is one of the least risk-bearing assets.Since most mutual funds invest in the stock market, it makes them riskier than gold investments in India.
LiquidityGold is a highly liquid commodity. You just need to go to the nearest jeweller to get your gold converted into cash.Since most of the mutual funds are open-ended schemes, they can be easily sold on the stock exchange.
Performance during CrisisGold displays high performance in times of crisis. The stock market usually takes a dip during a crisis, leading investors to look for safer options such as gold.The stock market takes a dip, and the NAV of the mutual funds fall. However, this is temporary in most cases because the funds are recovered when the market goes up.
Tax BenefitsGold investment in India does not come with tax benefits except for the sovereign gold bonds and gold monetization scheme.Under mutual funds, you can invest in tax saver funds to avail of tax benefits.
CompoundingGold investment in India does not provide the compounding benefit. It does not yield any dividends or interest that can be reinvested.Returns from the mutual funds can be reinvested and provide the best fruits of compounding in the long run.
DiversificationGold investment is a great way to diversify your portfolio.Mutual funds are inherently a diversification tool. A single mutual fund invests in a variety of companies

Taxation of Gold Investment Options

As an investor, it is essential to know that the taxation on returns depends on the mode of gold investment in India. People who purchase physical gold will be taxed differently compared to those investing in gold bonds.

Let us look at the taxation of different modes of gold investment: -

Digital Gold

The returns on digital gold are not taxable directly if you own them for less than 36 months. However, in the case of long-term capital gains, you will be required to pay 20% tax on the returns along with a surcharge and 4% cess.

Physical Gold

For short-term capital gains, the returns from physical gold are added to your income and taxed as per your applicable income tax slab rate. While in the case of long-term capital gains, investors need to bear 20% of returns as taxes. A 4% cess is also implied on these transactions.

Gold ETFs and Mutual Funds

Investing in gold through mutual funds or ETFs, a 20% tax rate plus a 4% cess is applicable for long-term capital gains. Short-term investors will have to pay tax as per their slab rate

Minimum Investment Requirement

From what we have discovered so far, there are numerous gold investment options at our disposal. However, it is to note that there’s a minimum investment requirement for certain gold investment options. Here’s a table to brief you about it.

Gold Investment OptionMinimum Investment
Gold (Physical)Variable, depends on price of gold. Equals price of 1 gm gold.
ETFVariable, depends on price of gold. equals price of 1 gm gold.
Sovereign Gold Bonds (SGB)Variable, depends on price of gold. equals price of 1 gm gold.
Digital GoldStarts at INR 1
Gold Mutual FundsStarts at INR 1

Things to Consider Before Investing in Gold

Financial markets usually swing to extremes during an economic crisis such as a pandemic. Gold is one asset that gains traction during these situations. If you are looking to invest in gold, here are some of the things you need to consider before investing: -

Performance

The performance of gold mutual funds and gold stocks can be different from physical gold. The gold price depends on various factors, including the demand and supply of the commodity and the economic condition of the country. Therefore, do your thorough research before investing in gold.

Security

If you are planning to buy physical gold, make sure that it is stored in a safe and secure place.

Portfolio Diversification

The price of gold moves inversely to the stock markets. However, this is not always the case. Therefore, it is vital to make sure that your investment portfolio is designed to face all weather storms.

Frequently Asked Questions(FAQs)

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There is no limit to gold investment in India. However, as a rule of thumb, you should not make gold investments more than 10% of your overall account value.

Gold, being a precious metal, can generate significant returns in the long run. Moreover, gold is highly liquid and can be easily converted into cash.

The factors that affect the gold prices in India include inflation, government gold reserves, jewellery market, interest rate trends and the global movement in gold prices.

Yes, the gold investment in India can prove to be an asset that hedges against inflation and stock markets.

If you are looking to make regular investments as opposed to a one-shot investment, gold funds can be a better and more rewarding option. However, for investors looking for a cost-effective option, Gold ETFs can be the right choice.

ARN: PCP/GIII/020823

Sources:

www.economictimes.indiatimes.com/mf/analysis/what-is-nav-or-net-asset-value/articleshow/76001600.cms?from=mdr

www.iepf.gov.in/IEPF/pdf/Chapter52_General.pdf

www.sebi.gov.in/sebi_data/faqfiles/may-2017/1494501305219.pdf

www.rbi.org.in/Scripts/FAQView.aspx?Id=109

www.economictimes.indiatimes.com/wealth/invest/you-can-invest-in-sovereign-gold-bond-using-rbi-retail-direct-portal/articleshow/88050947.cms22

www.business-standard.com/podcast/pf/what-is-digital-gold-and-what-are-pros-and-cons-of-investing-in-it-121110900055_1.html#:~:text=Digital%20gold%20is%20a%20virtual,sell%20value%20is%20one%20rupee.
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