4 ways to invest in Gold: Which one to use?

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Invest in Gold

Invest in Gold

There is a general understanding about investing in Gold:

“Gold is one of most stable asset to invest. Whenever there is volatility in stock market, gold prices go up.

Whereas, gold prices don’t fall much when stock market is bullish. It provides good hedge against inflation and recession in economy.”

But, that doesn’t mean Gold is an investment option from financial goal planning purpose. Gold is still only a commodity with no inherent benefit.

The only liquidity you have is option to sell it for generating cash.

I have explained the factors which should guide your investment in Gold. The thumb rule is that:

It is recommended to invest at max 10-15% of your investible portfolio in Gold. 

How to invest in Gold?

In India, there are 4 main ways of investing in Gold:

  1. Physical Gold
  2. Gold ETF
  3. E-Gold
  4. SBCs

Let me explain them one by one.

1. Physical Gold

This is one of most popular way of investing gold. You visit a jeweller (or even your bank these days) and buy your Gold in physical form.

You get certification of purity and you can buy either in form of jewellery or Gold coins.

Though it used to be preferred way of investing in Gold for long. It is not so anymore.

There are many problems associated with buying Gold in physical form. Especially, if you are buying it for investment purpose.

  • You have to pay for jeweller’s margin and making charges when you buy gold in physical form.
  • You need to take care of security and safety of your Gold
  • Buying Gold is physical form is prone of getting impure quality gold too. Thus, you need to pay extra for purity certification.
  • A small amount is deducted by the jeweller when you are selling back your Gold.

If you are buying jewellery for social value (like attending functions), then there is no alternative to buying Gold. Apart from that, I would recommend to buy Gold in any of the ways mentioned below. Avoid buying Gold in physical form.

2. Gold ETF

Gold ETFs work like Index fund. Such funds invest in Gold, where the Gold of certified quality is bought and held by custodian bank. This holding is done by Custodian bank on behalf of the Gold fund.

The charges that ETF deducts are related to management of the fund. Thus, it is quite low as compared to buying physical gold.

Usually the prices of Gold ETF units are close to benchmark prices, but with recent changes, this price can be little different.

The recent changes are regulations which allows ETF funds to hold certain amount in index derivative contracts or Gold Monetization scheme.

For buying Gold ETF, you need to have demat account and trading account for buying and selling the units.

 

3. E-Gold

This one is little known way of investing in Gold electronically. In this way of invest in Gold, you buy the real Gold in electronic form.

Yes, the Gold is bought and is stored by National Spot Exchange Ltd (NSEL) and MMTAP on your behalf.

Which means, if you want the physical delivery of your units, you can do. That too at minimal fee.

Thus, this approach is as good as buying the Gold in Physical form, but without any of the issues mentioned above.

The purity is guaranteed and standardised.

 

4. Sovereign Gold Bond Scheme

The Sovereign Gold Bond Scheme (SGBs) is scheme launched by RBI on behalf on Govt. of India purely for the investment in Gold.

You can read SGBs in more detail in this post. Here I will list down the two most important factor which makes it the best way to invest in Gold:

  1. You earn risk free interest on your investment. All other forms of investment in Gold doesn’t earn you anything except price appreciation.
  2. Your capital gain on investment is tax-exempted.  Which means, all the price gain that you have on your investment in this scheme is tax free. Again which is not there in any other way of investing in Gold mentioned above.

Should you invest in Gold?

Despite the recent rise in Gold prices, it is not advised to take Gold as a major investment choice.

Gold has no inherent benefit except expected price rise. And the price is dependent on sentiments of people investing in Gold. Like recent price rise is due to uncertainty in Global economy.

Gold used to be stable with pricing till couple of years back. Which is not the case recently. In 2019 alone, Gold prices have risen around 20% due to uncertainty on Global Economy. Such hike in prices can make you invest at wrong time for price cycle.

So, it is advised to invest a small part of your allocation in SGBs and ETF (for faster liquidity) and that should be it.

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