- Gold as an Alternative Investment Option
- Different Ways to Invest in Gold
- How or Where to Invest in Gold?
- How to Determine the Price of Gold in India?
- Tax Rates for Gold Investments
- The Road Ahead for Investing Gold in India
Gold as an Alternative Investment Option
The people of India have been investing in gold for several reasons like cultural and religious, since time immemorial.
But in today’s dynamic market, gold investment as a very good investment option is considered to be quite favourable as well.
It has a long term store of value i.e. it is a valuable asset that definitely maintains its intrinsic value intact without depreciating over the years.
If you ever face any economic crisis, gold comes in handy as it can work as a safety deposit box thereby making it superior to the other investment options.
It is also considered an attractive means of investment due to its consistent outperformance of the currency value and always has a strong presence in the market, even if the market collapses.
A lot of investors also like the fact that gold is a tangible asset form, wherein you can actually hold the gold ornament or the gold coin in your hand. So once you hold it in your hands, the feeling is surreal and you realise that the investment is real.
While on the other hand, other assets like bonds, stocks and mutual funds are usually given to the investor in the form of a piece of paper.
Liquid money usually involves a ‘promise to pay’, though gold does not require any such promise. In the last 3500 years’ history, gold prices have never been pegged at zero, thereby making it the only real financial instrument that is not an investor’s liability at any point of time.
The guide to Investing in Gold clearly states that gold helps to diversify your financial portfolio, thereby protecting the portfolio against any market volatility.
Gold is believed to have a low or a negative correlation with the other asset classes, like stocks and equity.
Even if gold may seem to be a volatile investment, that should not discourage you from making the investment.
History states that gold always increases in value and even if other traditional investments fail or falter, gold still reaps returns. Gold also offers good returns when the SENSEX generates good profits.
Gold investment is very lucrative as it provides a hedge instrument against inflation. The currency value usually drops as the inflation rates increase for a nation.
However, research states that gold prices have almost doubled in the last five years despite a rise in the inflation rates. In India, since inflation rates usually tend to transcend the interest rates, investment in gold is considered a good hedge against inflation.
Buying gold is also very essential in today’s volatile market due to its liquidity, which means that gold can always be bought and sold instantaneously.
If the need arises, you can sell all the gold stocks as they are highly liquid in nature. Even though the US dollar might rise or fall, the gold value is retained as it is, because it is placed in the global marketplace.
You do not need to possess any specialized knowledge to buy gold, it is fairly simple and straight-forward, thereby rendering it as an easy investment option for all the investors.
However, for investments in other stocks and mutual funds, you need some knowledge about the financial market volatility to make the right decision.
Here’s a complete guide on How to Buy Mutual funds in India .
Different Ways to Invest in Gold
Purchasing jewellery and ornaments is the best option to invest in gold, as witnessed in historical times. Several religious and traditional customs during any occasion like a marriage, engagement ceremony, the birth of a child in the family was definitely an opportunity to make a gold purchase.
Read more about how to plan your family’s future.
However, different ways to buy and own gold as a financial instrument have emerged now with the advent of paper gold, gold funds and physical gold like jewellery, gold bars, etc. to diversify your portfolio.
Hence you as an investor can get confused at times, with the type of gold you should buy and the place from where you should buy. You can invest in stocks in gold mining, refining and production.
Given below are a few gold investment options that you should consider before taking the plunge.
- Digital Gold Investment – Digital gold investment is the most cost-effective and lucrative means to invest in gold online. This way you can buy as well as sell gold in small fractions in absolutely no time, with a bare minimum of INR 10 too.The digital gold is usually backed by physical 24-carat gold and is linked to the actual real-time gold price movements. Majorly the companies offering to sell digital gold ensures that it is stored in properly secured vaults for insurance.Digital gold investment can be sold at any time and the funds will be credited to your account within two business days. The digital gold has zero making charge unlike the other jewellery or other forms of physical gold options and you can view your assets online.Also, there are a few digital gold platforms that allow you to possibly convert them into physical gold on public demand.
- Gold Bars or Coins – Many investors invest in gold bars or coins as they do not require any skilled artistry and hence no making charges are levied on them.These bars and coins are easily available at the banks, online shopping or e-commerce websites, jewellers and many NBFCs, i.e. non-banking financial companies.
- Gold Sovereign Bonds – Gold Sovereign Bonds one of the safest ways for digital gold investment and are issued by the Reserve bank of India (RBI), on behalf of the Government of India.There is a lock-in tenure of 5 years for these bongs with the overall period being 8 years and annualised yield of a rate of interest of 2.5% p.a.
- Gold Mutual Funds – Gold Mutual Funds usually invest in many gold reserves either directly or indirectly and include stocks of companies associated with mining and gold production, physical gold as well as distribution syndicates.Their performance is highly impacted by the gold price movements in the country.
- Gold Exchange Traded Funds (ETFs) – The Exchange Traded Funds allow you to trade gold on the stock exchange while having both the pros and cons of investing in ETFs and the advantage of investing in gold.Investors with a smaller risk appetite often choose a gold ETF as it is a smaller investment compared to the gold bullion, while the broad exposure can minimize your risk. Investing in gold as an ETF does not require the gold to be stored as a physical commodity.
- Gold Savings Schemes – There are various schemes available to help people make gold investments in instalments.There are a few predetermined amounts that you can deposit with the jeweller every month for a certain period. Once the period is over, you can buy gold from the same jeweller at a value equivalent to the amount deposited plus a bonus that is offered by the jeweller and can purchase gold at the ongoing gold price on maturity.
- Jewellery – Indians have an emotional connect with gold jewellery, be it for traditions or any auspicious occasion.Since it is a valuable metal, its safety is very vital to the investors.Also the making charges can go up to 25% depending on the design which is recoverable even when you plan to sell the jewellery.
How or Where to Invest in Gold?
If you are wondering the right market place to buy gold bullion, a government mint connected gold dealer or seller is the best place to ensure that you receive the real gold. You can buy it physically or online and any currency can be traded for gold bullion.
But if you are procuring gold from an unknown source, its purity certificate should be obtained.
E*TRADE can offer future contracts at a reasonable price, where gold futures can be traded only during certain months and at certain times during the day. You can take a short position if the commodity is sold at a lower price later.
If you buy gold in anticipation of a price rise, you can assume the long position. Research states that futures contracts can be chosen for more financial integrity, flexibility and leverage, that you can get from trading in physical commodities.
How to Determine the Price of Gold in India?
Gold price is impacted by demand and supply. As the demand for gold rises, prices increase and when the investors sell gold, the price drops due to excessive supply.
Movement in gold price behaves very differently than the other commodities, as the precious metal inculcates trust. When the other commodities’ performance decreases, demand for gold increases as people believes that the gold value will be intact.
This increased demand causes prices to soar higher thereby manifesting the desired effect and rekindling the trust in the yellow metal.
During an economic recession, a lot of panic is created amongst investors as stock markets crash. But people keep their focus on gold intact and the “gold rush” boosts gold price, thereby imbibing more investments in gold or gold stocks.
Tax Rates for Gold Investments
You should keep yourself well updated of the several taxation norms on gold, applicable in lieu of the profits that have been earned from the gold investments. You attract the capital gains tax in India when you sell gold.
In case the gold is held by you for less than three years, the returns earned are classified as STCG or short term capital gains and the taxes levied on it will be in accordance to the tax slab that is applicable to you.
In case you stay invested in the gold fund for a period of more than three years, the profits on it are called LTCG or long-term capital gains and are levied tax at a flat rate of 20%.
The Road Ahead for Investing Gold in India
Although the yellow metal’s price had plummeted from 2011 to 2018, 2019 saw some price correction, after which the pandemic driven India again saw a huge increase in the price of the commodity.
There is no certainty that this trend would continue but the movement in price will certainly impact your decision making.
There are also other factors that have to be kept in mind like the economic and political, geopolitical turmoil, while the future road is paved.
The dynamism in gold value makes them a not so favourable investment option for people who are quite anxious about the daily market performance.
So if you can handle a dynamic ride that entails such risky moments but ensures a substantial potential payoff at the end of this journey, then only you should take the initiative to invest in gold stocks.
Investment in gold is considered a long-term investment as it grows in value over time, though short-term investment is more volatile as the returns fluctuate a lot.
Based on the current and future economic conditions, gold is attractive in both the long term and short-term, but adequate research needs to be done to decipher if this is the right investment option for you.
If you have decided to move ahead to make an investment in gold, you should consider your financial objectives, risk-taking capacity, tenure and the investment horizon apart from using this beginner’s guide as a ready reckoner manual.
Hence, investing in a gold fund is very lucrative to strengthen your financial position for the long term.