My mother is a homemaker and always had a passion for buying gold jewelry. She would save up small amounts of money from household expenses and invest it all in gold.
One day I decided to have a discussion with her regarding the same. I explained to her that when buying gold jewelry, we pay a minimum of 5% making charges. At the time of selling, we only get a maximum of 92% of the gold value, even for the highest purity in gold jewelry.
To break even, the gold price would need to rise more than 14%
I gave her an example.
Let’s say the current gold price – Rs 50000/ 10 grams
Making Charges to pay – Rs 2500 (5%)
Total Payment – Rs 52500/ 10 grams
Assume you sold at the same price.
You will get – Rs 46000 (92% of 50,000), which is a 12% loss.
If the gold price is hiked by 14% – Rs 57000 (14% of Rs 50000)
Still, You will get – Rs 52440 (92% of the gold price)
Note: – Making charges can vary from one vendor to another and even from one brand to another. For the purpose of our calculation, I have taken the lower side of making charges, which is usually around 5%.
My mother looked stunned as I explained these calculations to her. I could tell she was upset. But I wanted to reassure her that there are other, better ways to invest in gold that I am going to share in this article with you.
You can invest in sovereign gold bonds to get the same safety and better returns. You can invest in gold mutual funds and ETFs as an alternative. Each of these options has its own set of advantages and disadvantages. You can choose based on your preferences and risk appetite.
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5 Different Ways to Invest in Gold in India
#1. Sovereign Gold Bonds (SGBs)
Sovereign Gold Bonds (SGBs) are launched in 2015 and issued by the Reserve Bank of India on behalf of the Indian government.
You can invest in gold without owing the metal in physical form through SGB. You can invest in SGBs in denominations of 1 gram, 2 grams, 5 grams, 10 grams, and 20 grams of gold.
The biggest advantage of SGBs is that you receive a fixed interest of 2.5% annually along with the price inflation return. You receive the interest payment for every 6 months and capital appreciation at the end of the bond’s tenure.
You can expect a similar return on SGBs gold ETFs and physical gold investments, with the added benefit of interest payments. Investing in SGBs is considered to be safe, as the bonds are backed by physical gold reserves and issued by the government.
Expected Return – 2.5% + Gold price appreciation
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Tenure – 8 Years
Minimum Investment – 1 gram of gold
- You receive a fixed interest rate along with the benefit of capital appreciation.
- SGBs are backed by the government, providing a high level of safety and security.
- Exempt from capital gains tax if you hold until maturity.
- 8 year lock-in period is on the higher side.
- Minimum investment requirement of 1 gram, which may not be suitable for all investors.
- SGBs may be impacted by changes in government policies and regulations.
How to Invest in SGB
You can invest in SGB through a bank or broker who participates in the SGB scheme. You need to apply for SGB through the bank/broker, and make payment. You will receive a certificate of holding on the date of issuance of the SGB from the issuing bank. You can read my step-by-step guide on how to invest in sovereign gold bonds.
#2. Gold Exchange Traded Funds (ETFs)
Gold ETFs are traded on stock exchanges and are designed to track the price of gold. When you invest in a gold ETF, you are buying a share in a fund that holds physical gold.
The value of gold ETFs is linked to the prevailing gold prices in the market. The expected return on gold ETFs is similar to physical gold investments. Gold ETFs are highly liquid and you can easily buy and sell during market hours.
Investing in gold ETFs is a cost-effective way to invest in gold, as the expense ratios are lower than other types of gold investments like physical gold and gold mutual funds.
You can invest in ETFs through your stockbroker like Zerodha. You would need to pay ~1% as an expense ratio which is not the case with SGBs. You can also read our guide on how to invest in mutual funds or ETFs in Zerodha, which would help you understand the whole process.
Expected Return – Gold price appreciation
Tenure – No
Minimum Investment – 1 unit of gold ETF, equivalent to 1 gram gold
- Gold ETFs are liquid investments you can buy and sell easily on stock exchanges.
- No storage or safety concerns as you invest in gold without the need to purchase physical gold.
- ETFs are accepted as collateral for loans.
- You would be charged about a ~1% expense ratio that can reduce your returns.
- Return on Gold ETF comes under long-term and short-term capital gain.
- Buying a minimum 1 unit (1 gram) is mandatory.
How to invest in Gold ETFs
You can invest in gold ETF through a Demat account and a trading account with a stockbroker. You can buy and sell gold ETFs on the stock exchange like any other stock. You can read my comprehensive guide on gold ETF investment.
#3. Gold Mutual Funds
Gold mutual fund invests in gold-related companies like gold distribution, gold mining, gold bullion, gold distributing syndicates, or physical gold reserve companies. The performance of the gold mutual fund doesn’t directly depend upon the gold price fluctuations but depends on the performance of the underlying gold companies.
Gold mutual funds are professionally managed by fund managers, and investors can buy and sell units of the mutual fund on the stock exchange.
Your portfolio gains explore the gold industry through gold mutual funds without worry about storage and security issues associated with physical gold.
You can invest as low as Rs 1000 in gold investment which is the biggest advantage of Gold mutual funds as compared to SGB and gold ETFs.
Expected return: you can expect about 8-10% per annum.
Tenure – Not fixed
Minimum Investment – Rs 1000
- Gold mutual funds provide diversification as the fund invests in multiple gold-related assets.
- You can buy and sell mutual funds on the stock exchange, making it easy to liquidate the investment.
- You can start investing with as low as Rs 1000.
- You would need to pay an expense ratio fee of up to 2.5%, which can eat your mutual fund return.
- The performance of the mutual fund is linked to the performance of the underlying assets not only to the gold price.
- Gold mutual fund performance depends on the skill of the fund manager. If the fund manager makes poor investment decisions, the performance of the mutual fund will be impacted negatively.
How to invest in Gold Mutual Funds
You can invest in gold mutual funds through a mutual fund house or Demat account with a stockbroker. You can buy and sell gold mutual funds like any other mutual fund.
Check out – detailed comparison of Angel One vs Zerodha for mutual funds in India
#4. Digital Gold
Digital gold is a new investment option that allows you to buy and sell gold digitally. You can purchase gold online through platforms like Paytm, and Amazon pay which is guaranteed 24k gold. An equivalent amount of digital gold is kept as physical gold in an insured vault by the seller.
All the gold-selling apps work as mediators helping you to buy gold from reputed companies like Augmont Gold Ltd, Digital Gold India Pvt. Ltd. – SafeGold, and MMTC-PAMP India Pvt. Ltd.
You can invest in 24k gold for as low as one rupee. You can sell the entire or a fraction of the gold anytime at the prevailing market rates. All these gold are 24K and are certified by the government.
You would be charged about 2-3 percent for the expenses such as the cost of storage, insurance, and trustee fee which is on the higher side.
Expected return: 2% to 3% lower than the gold price appreciation over time.
Tenuer – Not fixed
Minimum Investment – Rs 1
- You can buy and sell online through a mobile app.
- You can invest as low as Rs 1.
- You do not need to worry about storage or security concerns as the gold is stored in the insured lockers.
- The higher cost is associated with up to 3%.
- The digital gold is stored by a third-party service provider, and there is a risk of the service provider going bankrupt or facing any other operational issue.
- If you want to convert digital gold to physical gold, you need to pay additional charges and make arrangements for the delivery of the physical gold.
How to invest in Digital Gold
You can invest in digital gold through certain payment apps like Paytm, Amazon pay, or Airtel bank. You can buy and sell digital gold through these apps with a few clicks on your mobile.
#5. Physical Gold Investments (99.5%)
If you still want to invest in physical gold, I would suggest buying a pure form of gold like coins or bars that associate with the lowest cost.
I suggest you buy from a local trustworthy jeweler. I recently bought a pure gold piece which cost me only 0.5% of making charges. I got 99.5% pure gold at the price of 100%.
If you are interested in this proposition, I would suggest you buy 99.5% pure gold from the jeweler who would charge the price of 100% (no other making charges).
Expected return: Highest among the physical gold products
Tenuer – Not applicable
Minimum Investment – 1 gram
- Lowest making and handling charges as compared to ETF, mutual funds and digital gold.
- Physical gold investments can be easily converted into cash at any time.
- Physical gold investments require safe storage and can be vulnerable to theft or loss.
- Lower return as compared to SGB
How to Invest in Physical Gold
You can invest in physical gold through gold jewelers, You can also buy gold coins or bars from banks or authorized dealers.
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Comparison of Different Gold Investment Options
Here’s a quick comparison of the different options available in India:
Physical gold investments – High cost of making ( jewelry form) and storing physical gold, risk of theft or loss. Return is directly associated with the change in the gold price. A better option is if you with the pure form with the least making charges.
Gold ETFs – Highly liquid, low expense ratio as compared to Gold mutual funds and digital gold but more than SGB. Return is directly associated with the change in the gold price.
Sovereign Gold Bonds – Fixed 2.5% interest return along with gold price appreciation return. Safe and secure investment option, but higher lock-in period of 8 years.
Gold Mutual Funds – Diversification benefits, invest in a range of different assets. Higher expense ratio with high risk associated. Return is associated with the performance of the underlying asset.
Digital Gold – Easy to buy and sell online but carry higher cost associated by up to 3%. Return is directly associated with the change in the gold price.
You can also read our How to invest my salary in India article to know other investment avenues for a salaried person.
You should invest a maximum of 10% to 15% of your investment portfolio in gold. SGB is my favorite because of the higher return but 8 year lock-in period can be a concern for you.
At the second position, there is a toss-up between 99.5% physical gold with only 0.5% charges or Gold ETFs that comes with a ~1% fee but doesn’t require safe storage.
I am still not convinced about gold mutual funds and digital gold to consider for my gold investment portfolio.
Let me know your thoughts in the comments.
The tax implications of investing in gold in India will depend on the type of investment that you choose. For physical gold investments such as jewelry or coins, there is no tax on the purchase of gold, but there may be taxes applicable when you sell your gold.
For gold ETFs and mutual funds, there may be capital gains taxes applicable on the sale of your investment. Sovereign gold bonds are also subject to capital gains taxes, although these are waived if you hold the bonds until maturity.
Yes, non-resident Indians (NRIs) can invest in gold in India through a variety of different channels, including gold ETFs, sovereign gold bonds, and physical gold investments.
The amount that you should invest in gold in India will depend on your individual circumstances, investment goals, and risk tolerance. As a general rule, financial advisors recommend that you should allocate a maximum of 10-15% of your investment portfolio to gold.
Gold is generally considered a safe investment in India depending upon the investment instruments. Physical gold and SGB are many safe options as compared to Gold ETF, Gold mutual funds and digital gold.