Five important points to keep in mind while investing in gold

Last Updated: Thu, Feb 28, 2019 13:49 hrs
Gold (Image Courtesy: PTI)

Indians are obsessed with gold. The 'yellow' metal has historical and religious importance in the country. Be it weddings or religious activities, gold remains an important part of every Indian home. Even according to a data presented by the World Gold Council (WGC), India was a key driver of gold jewellery growth in 2017. It was the main contributor to the 8% gain in the second quarter (Q2) of 2017. In India, gold is popular not just for buying jewellery but also for making investments, thus the fluctuating gold rate makes a lot of difference for people’s investment plans in general. You can check the gold rate today in India to make informed investment. People who are interested in making gold investments must be aware of the following points:

1. Different Forms of Buying Gold

As an investor, the first thing that you must know is that gold comes in various forms. It is true that the demand for gold jewellery is quite high in India. However, it is not the only form to make investments. Over the years, different forms of gold investment options have emerged. A few of your gold investment options are:

     i. Physical Gold

Physical gold is the most popular form of gold. This is because from centuries it has been the only way to invest in gold. There are two ways to invest in physical gold, which are listed as follows:

     a. Jewellery

     Blame it on centuries old tradition or limited exposure to gold investment; Indians are most comfortable   investing in this form of gold rather than any other forms. However, if you're looking at returns, other avenues are more profitable than this. This is because in gold jewellery, investors end up paying unnecessarily for metals (mixed with gold) that neither they require or have a resale value. Gold investors also lose a lot of their money in making charges and wastage, which depreciates their gold price. The loss varies from 10 percent to 40 percent and depends on the design of jewellery. In addition to this, people who are building an investment portfolio consider buying jewellery as a display of wealth rather than investment.

     b. Coins and bars

     Physical gold can also be in the form of coins and bars. Unlike gold ornaments, gold coins and bars are made of pure gold. The purity of gold in coins and bars can be expected to be of 99.99%. Again, gold coins and bars are not ideal investment options. In case of coins, most banks charge high premiums and also do not buy their coins back once sold. Bars are good investment option, however, requires much high minimum investment, which may not be possible for a common investor.

     ii. Gold Exchange Traded Funds (ETFs)

     Gold Exchange Traded Funds are open-ended mutual funds and are quite popular among gold investors. Since its underlying asset is gold, therefore, its value depends on the price of gold. Since the funds are traded through demat and a trading account, therefore, they are easier and safer mode of investment. As compared to other available avenues, the charges included in gold ETFs are very less.

     iii. Gold Fund of Funds

     People who do not have a demat account can invest in Gold Fund of Funds. Gold fund of funds, as the name suggests, is an investment strategy in which a fund invests in different types of gold funds such as other gold mutual funds or ETFs. The basic idea of this investment option is to offer greater diversification and access to high-minimum funds. However, this adds another layer of fees for the investors and eats their returns on the whole.

     iv. Sovereign Gold bonds

     Sovereign Gold Bond (SGB) is yet another option for investors to make gold investments. SGB is basically government securities that can be held in a demat account. They are denominated in grams of gold. With these bonds, investors can earn returns while eliminating the risk of physical gold storage and hassles of purity. Unlike in physical gold investments, SGB do not include unnecessary costs such as making charges and storage costs. Also, these bonds can be used as collaterals to get secured loans from most of the banks.

     v. E-Gold

     E-Gold is a great investment option offered by National Spot Exchange (NSEL). In this type of investment, investors can buy and sell gold in small denominations such as 1 gm or 2 gm whose price is based on the current gold rate in Chennai. Every transaction that takes place reflects in the investor’s demat account. Other advantages of this type of investment are that it has transparent pricing and seamless trading. In addition to this, it also saves on investor’s charges on insurance and gold storage.

2. Capital Appreciation

Gold is a perfect hedge for inflation and also against depreciation of Rupee. But when it comes to absolute returns, gold has not stood up to the expectations. It has given returns at just 0.8 percent above inflation. In fact, shares and real estate are found to be better than gold in terms of capital appreciation as the former have given larger return values over inflation. The best time to invest in gold is during uncertain times, falling of markets and very high inflation.

3. Risk

In India, there is not much risk involved when it comes to gold. This is because there is hardly deflation in the market. Another risk involving gold investments could possibly be in sovereign gold bond. In this, the risk is that you don’t know what the future prices of gold will be at the time of its maturity. Another real risk involving gold could be in losing the opportunity to invest in other avenues that can give higher returns.

4. Liquidity

When it comes to liquidity, gold is a great investment option. If you have jewellery, you can sell it to the same jeweller you bought it from to get cash. Even banks would give you a loan if you pledge your gold against it. Remember, although banks sell coins to customers, they never purchase it back and many don’t even give loan on it (even if the gold coin was sold by them). You can get secured loan against gold bonds as well. Those who trade in gold electronically can also sell gold and get money through it in their accounts.

5. Tax treatment

As per the Income Tax Act, the profit garnered by selling gold is taxable under the 'Capital Gains'. The tax liability and exemptions from payment of tax depends on the period till you hold it before selling. If you buy gold and gold ornaments and sell it within 3 years, it is treated as short term capital asset, which added to your regular income and taxed at the slab rate applicable. Similarly, if you buy gold or gold ornaments and sell it after 3 years, it is treated as long-term capital asset, which is taxed at 20 percent and applicable surcharge and educational cess. Even though your gold does not generate profit, still you will have to pay tax under ‘wealth tax’ guidelines given at the Income Tax’s website.