Buying gold coins/jewellery from a gold shop – This is one of the most basic, simple ways to invest in gold. In which the investor buys gold coins or jewelery as per his need and desire. However, there are various expenses incurred while buying gold jewelery in physical mode which are as follows.
The price of gold
Goods and Services Tax
Making charges
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waste
All these charges make the total acquisition cost of gold more expensive compared to other modes of investment
Moreover, if one goes to sell the existing jewelry or gold in a jewelry shop, the customer will get the price of the gold according to the market price. However, if the purity of the jewelery is not up to the mark, the customer may get less funds for the gold sold hence the overall investment suffers.
Coins/bars are taken by jewelery shops if one has the original bill available and the purity of the gold is not compromised.
Buying Sovereign Gold Bonds – Sovereign Gold Bonds are one of the effective ways introduced by the Government of India to convert investments into digital mode instead of physical. SGB investments come with the following benefits.
It pays 2.75% semi-annual interest to the investor on the initial investment.
Zero risk of handling physical gold
Investment in SGB is tax free if held up to maturity of 8 years.
The tenure of the bond is for 8 years with an option to redeem from the 5th year on the date interest is payable.
SGB can be used as collateral for loans
It can also be traded on the exchange although liquidity may be an issue for the investor
Investors with a long-term outlook can also benefit from capital growth in gold
There is no need to pay GST on this as it is a digital mode of investing in gold.
It comes with a sovereign guarantee on both the redemption amount and interest as it is backed by the Government of India.
Investment in Gold ETF/Gold Bonds
Gold Funds
Pricing – The value of mutual fund units is derived from the NAV at the end of the trading session
Mode of Investment – No demat account is required to invest in gold funds. One can invest by visiting the fund house’s website or branch
SIP Option: Systematic Investment Plan (SIP) with small amounts (as low as Rs. 500) at regular intervals. SIP leverages the power of compounding by keeping the investment amount light on one’s pocket
Transaction cost: A gold fund may or may not charge an exit load at the time of redemption of the unit.
Expense Ratio: Expense ratio refers to the fees charged by the fund house for the administration and management of the fund. While both schemes are passively managed, as gold funds invest in gold ETFs, gold funds have higher expense ratios than gold ETFs.
Liquidity: Gold fund units can be redeemed by selling them back to the fund house at the applicable NAV.
ETF
Pricing – One can get the real time price of gold ETF from stock exchange at any time during the trading session.
Mode of Investment – Gold fund units can be purchased directly from stock exchanges after opening a demat account.
Minimum investment – The option to invest through SIP is available in case of gold funds but not in case of gold ETFs. The minimum investment amount for gold ETFs is usually Rs. 5,000 is
Transaction Cost – No exit load is applicable in case of gold ETF as it is traded on stock exchange.
Expense Ratio – While both the schemes are passively managed, as gold funds invest in gold ETFs, gold funds have higher expense ratios than gold ETFs.
Liquidity: Gold ETFs support intraday trading on stock exchanges and are therefore more liquid (easily convertible into cash/cash equivalents) than gold funds.
Trading on Exchanges – To take advantage of price volatility, one can trade on exchanges. However, trading on exchanges has the following positives and negatives.
Excessive volatility will lead to a reduction in capital investment.
Buying and selling can be profitable by trading on volatility.
One needs to have enough margin to trade.
Among all these options, buying SGB is one of the best and effective ways to buy gold in India. The benefits are more than all other options available for investment in India.
Overall, the return on gold investment does not change in any of these options as the underlying base in all options is gold. However, the return on trading gold on exchanges can vary depending on how one manages the overall risk-reward of the investment.
(The author is Deputy Vice President, Research – Non-Agri Commodities and Currencies at Angel One)
(Disclaimer: Recommendations, suggestions, opinions and views given by experts are their own. These do not represent the views of Economic Times)
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