How to Invest in Gold in India

The luster of gold is too good to resist whether to wear it or invest in it. Research shows that over 16,000 tons of gold is there in Indian households predominantly in the form of jewellery. Read this complete article to find out how to invest in gold through options like jewellery, coins, bullion, ETF, Mutual funds, etc.

Gold is the preferred type of investment of Indians because of the potential price increase and as a hedge against inflation.  Statistics have revealed that when inflation increased by 10% gold prices have increased by 30%

Why Invest in Gold?

Gold has been the most trusted investment vehicle through generations. The current gold price is expected to go up further as gold production worldwide is far below the demand. Gold is the only medium of exchange that is completely free of credit risk.

In the past two decades investments in gold with an average return of 7% has proved to be a dependable hedge against inflation. If the same trend persists, which is most likely, you can expect a return of anything between 6 to 9% as a long term return.

Gold ETFs have been good investment options ever since the global economic crisis started in mid 2008.

So, How to Invest in Gold?

Akash wants to plan in advance for his daughter’s marriage and wants to invest Rs 1 lakh in gold. In the good old days, his only option would have been to buy gold jewellery, but now he has numerous options. Let’s explore the top 5 options available to him.

1. Jewellery

Owning gold jewellery gives the advantage of owning gold physically and also using it for fashion as well as prestige. But the disadvantage of theft cannot be ignored. \

There may be loss of value due to impurity, making charges and exchange rates if you need to sell them. You can buy jewelry at a local jewelry store or from a retail chain such as Tanishq.

2. Gold Bullion Bars

The oldest form of wealth preservation is to hold gold bullion bars. These bars can be bought in denominations of 10 Grams, 20 grams, etc. from authorized jewelers or banks. It offers the satisfaction of holding the gold and ease of purchase online. But you must safeguard with a safe deposit vault and insurance which costs money. Gold bars have higher purity than coins and jewelry and have a higher value in the market.

3. Gold Coins

The gold coins are easy to store. They are also worth slightly more than the actual price of gold. They are available in sizes of 1/20th of an ounce to 1 ounce. In India Gold coins are available in various denominations (1gm, 2gm, 5gm, 10gm, etc) in banks, post offices, jewelery stores, etc. Buying at banks may be expensive due to the mark up, but these are more accessible and affordable for retail investors compared to gold bars.

In addition Gold coins have numismatic value as a collectors’ item and thus numismatic coins are exempt from confiscation. But the disadvantages are you incur costs for storage, insurance and there is no interest yield.

4. Gold Certificates/Deposit Schemes

The gold certificates are proof in the form of a certificate as proof of your holding gold. The scheme allows individuals and institutions to deposit their gold with the bank for a predetermined period and receive a `Gold Certificate’ or passbook as proof of deposit. The bank will pay interest of 3-4 per cent per annum (please verify prevailing rates) on the deposit, depending on the duration.

They are safe in the sense that they allow you to enjoy ownership of gold bullion providing you the safety and convenience of storage by a bank. The other advantage is that you do not pay for storage and insurance while you own the gold. However, there is a minimum quantity (e.g. 200 gms, 500 gms, etc.) that has to be deposited to avail this facility.

5. Gold Exchange Traded Funds (ETF)

This is a mutual fund that invests the money collected from the investors on gold bullion. Your holdings are in units, listed in the stock exchange. This is the safest way to invest in gold. By buying the ETF you are buying shares in a fund that is based on the market price of gold. Each unit generally represents one gram of gold. Gold ETF can be bought and sold with the ease of a click of a mouse.

You can purchase Gold ETFs if you have a trading account with a brokerage house (Indiainfoline, Kotak, Sharekhan, etc.).  Please read about the best gold ETF in India

Moreover, gold in the paper form does not attract wealth tax. Large investors have the option of converting the paper holdings into physical gold. The fees for storage, insurance and other essentials are included in the cost.

This method provides all the benefits of buying and holding gold while there are too many pitfalls and risks involved in trading gold in physical form, like undervaluation, wastage, and other added charges and safety concerns when transporting. Accumulated in small quantities over time is a good way of earning good returns for the small investor.

6. Gold Mutual Fund

Please read Gold ETF vs Gold Mutual Fund to find out more about gold mutual  funds

Summary

Gold * You may face potential disadvantages such as low liquidity, higher expense ratio if you chose the wrong fund. But the risks or losses even in case of a wrong choice may be limited.

Conclusion

We now know the advantage of taking an exposure to Gold, however, remember that it is going to be one part of your portfolio which is important to provide you the ability to tide over inflation as well as financial and economic uncertainties.

Like any other asset class gold has its own risk and returns that investors need to be aware of. If we look at the past 15-20 years record, it is seen that Gold is a good hedge against inflation.

In India, over the last one year Gold ETFs have been giving approximately 26% return p.a., while equities (Nifty) provided a return of just 4% (Value Research Online, 22 March 2011). This is not to prove one is better than the other, but to remind you that equities can outperform gold in future, so having a mix of both is recommended.

You have only known equity and debt all these years, and gold was just for ornamental purposes. But now time has come for you to consider the yellow metal as an asset class that is capable of adding that extra shine to your portfolio.

More reading at Gold as an Investment

About the Author

Sridhar is a financial analyst and his work experience spans areas of financial analysis, modeling, valuation and research on companies, specific sectors, etc. Sridhar is an MBA graduate with Finance major from Maharishi Institute of Management.

Leave a Reply