Gold is considered the best hedge against inflation; the return on it is unfailingly in line with the inflation rate. What’s more, it has consistently outperformed the equity market in the past one decade.
Yet we simply stash it away in bank storage lockers or home lockers in the form of jewellery. Sometimes we also avail loans against it to fulfil certain immediate requirements like buying a plot of land or funding child’s education. Both state-owned and private sector banks, along with non-banking finance organizations offer loans against gold at attractive rates.
But that’s the maximum most of us have gone in putting the yellow metal to good use. And we are pretty much oblivious of the myriad other ways in which we could make more of it.
Below is a quick guide on those myriad ways in which one can invest in gold, so that you can decide for yourself on how best to capitalise on it.
This is the conventional method of investing in the precious metal. Most Indians buy gold jewellery to hoard it in bank or home lockers. However, this cannot be labelled exactly as “investment.” It is simply consumption. Moreover, making charges required for crafting the piece of jewellery also means you end up getting less when you try to sell it off. Besides, there is always a chance of theft or being duped with the quality of gold.
However, if you still want to invest in physical gold, simply buy gold coins or bars, which are sold by all banks and jewellers. But remember that banks only sell it and do not buy back. A drawback of gold bars and coins is that they are always sold at a premium price and hence at the time of selling an investor ends up getting less.
Gold Exchange Traded Funds (Gold ETFs)
Gold ETFs, which is nothing but an open-ended mutual fund that tracks the price of gold, is a more savvy way of investing in the safe haven metal.
To buy gold ETFs, one needs to have a demat account (also known as dematerialized account that provides the facility of buying and holding shares and securities in electronic format) and trading account. All one needs to do then is to choose the ETF one wishes to go with. There are also minimal fund management charges.
ETFs are akin to investing in stocks. You can start with as small an amount as 0.5 gm and can sell it when time is ripe or when you need the money. This makes ETFs liquid.
Gold ETFs are gradually becoming popular as it saves investors the hassle of having to keep physical gold safe. Besides, some ETFs deliver physical gold too on request.
Some of the popular gold ETFs are Birla Sun Life Gold ETF, Goldman Sachs Gold ETF, SBI Gold ETF, Religare Invesco Gold ETF, IDBI Gold ETF, etc.
e-Gold was launched some time back in India by National Spot Exchange Limited (NSEL), which also allows online investment in other commodities, namely platinum and silver. It is very much like Gold ETF, held electronically in the demat form. The demat account for investing in e-Gold should be with one of the companies authorised by NSEL.
The best part of e-gold is that you can opt for delivery of physical gold if you want or simply choose to benefit from the online trading. Besides, it is known to have beat gold ETFs so far vis-à-vis returns.
Both e-gold and gold ETFs are taxed. But while the former attracts a wealth tax, the latter is treated as a financial asset and hence are taxed accordingly.
Gold Mutual Funds
Gold Mutual Funds involve investing in companies engaged in gold mining or those associated with gold related activities. They also buy limited amounts of physical gold. For those who want to benefit from gold prices, this is not the investment, since there could be variance from the prevailing market price. Some of the popular gold funds are SBI Gold Fund, Kotak Gold Fund, Axis Gold Fund, etc.
Sovereign Gold Bond (SGB)
Denominated in grams of gold, SGBs are government securities that offer fixed rate of interest. The bond holder can redeem the bond at the prevailing value of gold. Investors are required to pay the issue price in cash and the bonds will redeemed in cash too on maturity.
SGBs are sold through scheduled commercial banks, designated post offices, BSE (Bombay Stock Exchange), NSE (National Stock Exchange) and SHCIL (Stock Holding Corporation of India). One can also apply online for it.
The tenor of SGBs is eight years and one has the option to exit in the fifth year. It is exempt from capital gains tax if held till maturity. It is not just sold but also traded on bourses as well.
SGB holders can also use it as collateral for loans.
The idea behind launching such a scheme is to curb Indian’s insatiable hunger for physical gold, which is mostly met through imports thereby worsening the economy’s current account deficit (the amount by which the nation’s imports exceeds its imports).
Gold monetisation scheme
Yet another scheme meant to discourage us from buying physical gold and to increase the amount of gold with banks, was launched in 2015. It allows people to deposit their gold with a designated bank in a metal account and earn an interest on it. It is decidedly a far better option than keeping it in storage lockers of banks and pay for it too.
The minimum deposit required to avail the scheme is 30 grams of gold of any purity. There is no upper limit. One can deposit it for short term, medium term or long term.