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Gold Investment Plan in India

Gold is a preferred investment option in India due to its high liquidity and ability to beat inflation over the long term. Traditionally, people have invested in physical gold jewellery. Today, options include digital gold, gold ETFs, gold mutual funds, and RBI’s sovereign gold bond scheme. ...Read More

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Gold Investment Plan

Gold Investment Plan in India

Gold Investment in India
July 23, 2024

Table of Content

 

Why should you invest in gold?

Here are some reasons why you should say yes to gold investment in India:

  • Assists in Beating Inflation

Historical returns are a proof that gold retains its value over the long term and helps in beating inflation. This is primarily because gold’s value increases with the cost of living, and often peaks during high-inflation periods.

  • Portfolio Diversification

Investment in gold provides a much needed level of diversification to your investment portfolio, which is essential to balancing the risk-reward ratio. Since the value of gold is inversely proportional to stocks and some other traditional investment options, gold investment in India can behave as a safety net amid market volatility.

  • Supply and Demand

Given that gold is a natural resource, there is a limited supply of this precious yellow metal. This means that there will always be a demand for gold, and such constant demand for gold amid its limited availability is what makes gold a good investment option in India. Gold demand is also high, especially in a country like India, because of its cultural significance, as no auspicious occasion is considered complete without gold, whether its your marriage or a child's birth.

  • Liquidity

One of the biggest benefits of gold investment in India is the yellow metal’s high degree of liquidity. Gold’s liquidity helps investors sell it or take a loan against it during times of financial emergency or whenever they need immediate funds.

  • Stabilizes Against Currency Devaluation

Another reason to say yes to gold investment in India is the yellow metal's ability to stabilise against currency devolution. Unlike even the strongest currencies that lose their value during uncertainties in the financial markets, gold is an asset class that often protects investors from currency devaluation.

  • Valuable Assets during Crises

Gold is often called the 'crisis commodity' because of the yellow metal's ability to retain its value and survive even in the worst of times, such as geopolitical and financial uncertainties. This is why many countries around the world have huge gold reserves to combat any adverse situation.

  • Simple to Own

The ease and convenience of buying gold in various forms is what makes gold investment in India a popular and wise choice. Gold investment can be made through physical gold, digital gold, gold mutual funds, gold exchange traded funds (ETFs), RBI’s sovereign gold bonds, etc. The presence of such different options gives investors both the flexibility and ease of buying and selling gold.

  • Returns

Historical returns of gold indicate that this precious yellow metal often beats inflation. Irrespective of the market and economic scenario, gold has always managed to rise and provide significant returns, especially over the long term.

Ways to invest in gold

Besides the traditional and common way to invest in gold through the purchase of physical gold such as coins, jewellery, bars, or ornaments, there are some newer forms of gold investment in India.

  • Investing in physical gold

This form of gold investment includes the purchase of physical gold such as jewellery, coins, bars, ornaments, etc. Physical form gold can easily be sold at a higher value in the future, thus making it a good investment option in India. But keep in mind that physical gold has some downsides, such as making charges, risk of theft, and storage hassle.

  • Gold ETFs (Exchange Traded Funds)

Gold ETFs (exchange-traded funds) are dematerialised units or paper representations of the physical form of gold. Instead of direct investment in physical gold, investors can purchase proportionate ownership of gold in a collective vault when buying ETFs. 1 Gold ETF unit is considered proportionate to buying 1 gram of gold.

  • Gold Mutual Funds

Another alternative to buying and storing physical gold is investing in gold mutual funds, also called gold funds. Gold funds are a type of mutual funds that invest directly or indirectly in the stocks of gold mining companies.

  • Gold Schemes

Many jewellers across India offer gold schemes to ease the purchase of this precious yellow metal. While the mechanism of gold investment schemes varies from jeweller to jeweller, most of them offer regular and small investments. All you need to do as investor is to invest a pre-defined amount for a particular period of time,such as one year or three years, in order to accumulate a significant amount that can ultimately be used to purchase gold.

  • Digital Gold

Digital gold is a relatively newer but increasingly popular gold investment option in India. As its name suggests, the mechanism of digital gold works just like any digital investment option, wherein investors can buy, sell and store gold through online financial platforms.

  • Government-backed Gold Bonds

Sovereign gold bonds are a gold investment option in India introduced by the country’s central bank, i.e. the RBI (Reserve Bank of India). Sovereign gold bonds are government backed securities that are traded in the form of gold. Investors can buy these bonds either in physical, digital or demat format.

Physical Gold

Gold ETFs

Gold Mutual Funds

No demat account is required

A Demat account is required

No demat account is required

Gold prices may increase with rising inflation

Changes in gold prices directly impact Gold ETF prices

Changes in gold prices do not directly impact gold mutual funds

No investment charge is involved when you buy gold jewellery

Paperwork is required when you trade in Gold ETFs

Gold mutual funds require paperwork for trading

The buyer bears the risk of gold theft

No risk of theft as Gold ETFs do not involve any physical storage

No risk of theft as gold mutual funds do not involve any physical storage

No paperwork involved in trading of physical gold

Paperwork is involved in the trading of Gold ETFs.

Gold mutual funds require paperwork for trading

Stock market fluctuations do not impact gold prices

Stock market fluctuations do not impact gold prices

Stock market fluctuations do affect gold mutual funds

No SIP (systematic investment plan) option

No SIP (systematic investment plan) option

Gold mutual funds give investors the option to invest through the SIP mode

Best suited for investors with a conventional investment approach

Best suited for investors having a taste for intraday trading

Best suited for investors having a higher risk appetite and interest in the stock market

 

Minimum Investment Criteria for Investing in Gold

The minimum investment criterion for investing in gold varies from one gold option to another. The following table adequately sums up the minimum investment requirements for different gold instruments:

Types of gold investment

Minimum investment amount

Physical gold

₹ 6,000-₹ 7,000 (as per current price of 1 gram gold)

Gold ETF

Depends on the current price of one unit of ETF

Sovereign gold bonds

₹ 6,000-₹ 7,000 (as per current price of 1 gram gold)

Gold mutual funds

Starts at just ₹100

Digital gold

Starts at just ₹1

 

Evaluating Returns & Costs of Different Gold Investment Options

Returns generated from gold investment are inversely correlated to the cost of making that investment, implying that lower costs result in higher returns and vice versa.

The reason behind this is that the underlying asset, i.e. the price of gold, is the same – a rise in the gold price would lead to an increase in the value of your investment, while a downfall in the gold price could potentially result in a loss. Here are the various costs associated with each gold investment:

Types of Gold Investment

Key Cost (Approx.)

Physical Gold

● Making charges (at 10% of gold value/a flat rate)

● Insurance storage charges (at 3%- 4% per annum)

● GST (at 3% of purchase price)

Digital Gold

● GST (at 3% of purchase price)

● Spread (2%- 6%)

Gold ETFs

Total cost of 0.5%-1% annually, including:

● Expense ratio

● Brokerage

● Demat account charges

Gold Mutual Funds

Total cost of 0.6%-1.20% annually, including:

● 0.5%-1% for gold ETF investment

● 0.1%-0.2% for the expense ratio of the fund

Sovereign gold bonds

No major visible expenses


What are Gold Funds?

Gold mutual funds are among the newest forms of gold investment plan in India. Gold funds are open-ended mutual funds that invest in units of a gold ETF (Exchange Traded Fund) with the aim of creating wealth by maximising the potential of gold as a commodity. Gold funds are best suited for investors who are interested in getting gold exposure. Without holding precious yellow metal physically, gold funds allow you to enjoy similar benefits along with professional fund management.

All gold mutual funds have an expert fund manager who makes investment decisions according to that particular fund's primary objective. The returns of gold funds tend to be closely related to those of gold ETFs. Moreover, the NAV (Net Asset Value) of the gold mutual fund can also be affected by the overall price movement of gold in the market. Gold funds serve the purpose of both short term investment plan as well as long term investment plan.

Tax Rules for Investing in Gold

  • Digital Gold

If you sell the digital gold within three years (36 months) of purchasing it, the profit falls in the category of STCG (short-term capital gain). STCG tax for gold investment plan is taxed as per your income tax slab.

But if you sell the digital gold after three years (36 months) of purchasing it, the profit falls under the LTCG (long-term capital gain) category. LTCG tax is levied at the rate of 20.8% with indexation benefit on the returns (20% plus a 4% cess).

  • Physical Gold

Taxation is the same for digital gold and physical gold investment in India. If you sell the physical gold within three years (36 months) of purchasing it, the profit falls in the category of STCG (short-term capital gain). STCG tax for gold investment is taxed as per your income tax slab*.

But if you sell the physical gold after three years (36 months) of purchasing it, the profit falls under the LTCG (long-term capital gain) category. LTCG tax is levied at the rate of 20.8% with indexation benefit on the returns (20% plus a 4% cess).

  • Gold ETFs and Gold Mutual Funds

If bought on or after April 1, 2023 -

Gains on sale of Gold ETFs and mutual funds are taxable at the applicable slab rates if bought on and after April 1, 2023.

If bought before April 1, 2023 -

Similar to physical and digital gold, the income tax rules for gold ETFs and gold funds are no different. If you sell the units of gold ETFs or gold mutual funds within three years (36 months) of purchasing it, the profit falls in the category of STCG (short-term capital gain). STCG tax for gold investment plan is taxed as per your income tax slab*.

However, if you sell the units of gold ETFs or gold mutual funds after three years (36 months) of purchasing it, the profit falls under the LTCG (long-term capital gain) category. LTCG tax is levied at the rate of 20.8% on the returns (20% plus a 4% cess)*.

  • Sovereign Gold Bonds

Interest received on Sovereign Gold Bonds are taxable. However, there is no capital gains tax at the time of its redemption by an individual In case these bonds are sold in the secondary market then they are taxed at slab rates if sold within three years and if sold after three years they attract LTCG at 20% with indexation benefit. 

Important Factors to Think About Before Investing In Gold

  • Performance

The performance of gold depends upon what form of gold you invest in. For example, the returns from physical gold would differ from those of gold mutual funds, sovereign gold bonds, or gold ETFs. Even the price of gold depends on many factors, such as the demand and supply of the precious yellow metal, the economic condition of India, etc. 

  • Security

Unlike digital gold, gold ETFs or gold mutual funds, you need to be extra careful when planning to purchase physical gold for investment. Make sure the physical gold is stored securely in a safe and reliable place to avoid theft or misplacement.

  • Diversifying Your Portfolio

Gold prices have historically moved inversely to the stock market. But that may or may not always be the case, this is why you must assess your current investments across different asset classes and then accordingly invest in gold so that your portfolio gets the required level of diversification to face ups and downs of the economy as well as the market.

Understanding the Risks Associated With Gold Investments

Just like other asset classes such as bonds, equities, real estate, etc., gold as an investment is prone to some risks, which differ across various forms of gold.

  • Types of gold investments and their risks:

Physical Gold: Risk of theft, purity issues, loss during manufacturing

When buying physical gold as an investment in India, you must be aware of & consider the risks associated with the decision. Physical gold poses the risk of theft if not stored securely. The risk of purity issues also exists, as the gold may not turn out to be as pure as claimed if not checked properly when buying. For example, a 22 carat gold jewellery turns out to be a lower priced one such as 18 carat. Another risk of physical gold purchase is the loss during manufacturing, such as wastage.

Gold ETFs and Gold Mutual Funds: Market risk due to volatility in gold prices

Both gold ETFs and gold mutual fund share the market risk because of the volatility in gold prices. For gold ETFs and gold funds, the underlying asset is primarily the same, i.e. physical gold. For example, gold ETFs invest in physical gold or in the gold mining companies’ stocks.

That is why, ups or downs in the prices of gold would impact the performance of gold ETFs too.

Similarly, gold mutual funds invest primarily in gold ETFs, thus both physical gold as well as stocks of gold mining companies end up becoming the underlying asset for gold fund schemes too. But it is noteworthy that both gold funds and gold ETFs are currently regulated under the guidelines of India’s market regulator SEBI.

Digital Gold: Regulatory risk due to lack of oversight

Investment in digital gold in India currently lacks adequate regulatory oversight since it does not yet have a regulatory body like the RBI or SEBI to oversee it. Also, there are very few dominant players in the digital gold market, which increases the overall risk of investment, too.

Sovereign Gold Bonds: Risk of sovereign default by the govt of India

Though sovereign gold bonds are among the safest avenues to invest in gold in India, some risk is still there. The sovereign default risk exists due to the fact that sovereign gold bonds (SGBs) are not backed by physical gold but instead by a derivative of gold issued by the Indian government through the RBI. In such cases, the government uses the gold price as a benchmark and then accordingly issues the bonds, which guarantee periodic interest payments (at 2.5% per annum), along with investment value at the time of maturity. 

Here, a sovereign default refers to an unusual scenario where the Indian government is no longer able to make the scheduled repayments on its outstanding debt in a timely manner. This situation could typically occur when the country's debt levels are significantly high and there is a simultaneous economic downturn happening in the country. 

Summary

You should choose the right form of gold investment plan after careful comparison of the risk, returns, minimum investment requirements, costs, degree of liquidity, and taxation. While a particular form of gold investment in India, such as physical gold, may be suitable for one individual, it may or may not be suitable for another individual. Depending on your investment horizon, risk tolerance, & return expectations, choose the gold investment instrument that best suits your financial requirements.

However, no investment plan is complete without considering comprehensive financial security for your loved ones. Integrating life insurance into your financial strategy can provide a robust safety net, ensuring that your family's future is protected against uncertainties. While gold can protect your wealth, life insurance can protect your family, offering them financial stability and peace of mind even in your absence.

By balancing your portfolio with both gold investments and a solid life insurance policy, you can create a resilient financial plan that not only grows your wealth but also safeguards your family's future. This dual approach ensures that you are well-prepared to face any economic fluctuations and personal uncertainties, providing holistic financial security and peace of mind.

FAQs on Gold Investment Plan

Q. What is the best investment in gold?

The best investment in gold in India would depend on your investment horizon, risk tolerance, & return expectations. Choose the gold investment instrument that best suits your financial requirements, after comparing them on the basis of risk, returns, minimum investment requirements, costs, degree of liquidity, and taxation.

Q. Is gold investment in India profitable?

Although gold prices tend to be volatile in the short term, they have historically proven to retain its value over the long term and provide inflation beating returns. Gold is also used as a hedge against the erosion of the value of major currencies.

Q. How to earn money from gold?

You can earn money from your gold investments by selling them at the right time to earn profits. When the value of your gold investment increases and you decide to sell it, you get to earn money through the returns in the form of profit.

Q. How much should I invest in gold in India?

While there is no hard and fast rule or limit regarding how much to invest in gold in India, it is generally advised to invest about 10%-15% of your overall investment portfolio into gold.

Q. What are the ways to invest in gold?

You can invest in various forms of gold in India, such as digital gold, gold ETFs, physical gold (like jewelry, coins, bars, ornaments, etc.), gold mutual funds, and sovereign gold bonds.

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Francis Rodrigues Francis Rodrigues

Francis Rodrigues has a decade long experience in the insurance sector, and as SVP, E-Commerce and Digital Marketing, HDFC Life, manages the online sales channel, as well as digital and performance marketing. He has had hands-on experience in setting up sales channels and functional teams from scratch over a career spanning 2 decades.

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Vishal Subharwal Vishal Subharwal

Vishal Subharwal heads the Strategy, Marketing, E-Commerce, Digital Business & Sustainability initiatives at HDFC Life. He is responsible for crafting and ensuring successful implementation of the overall organisation strategy.

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