Intro to Gold Investments
Welcome to the chapter on Gold Investments.
This chapter may seem a bit strange to an Indian as we have a yearning for gold that makes us one of the world’s largest consumers of the yellow metal.
Each year, millions of us buy gold as it forms an integral part of every marriage ceremony (and quite a few others also). But this chapter is not about our traditions and cultures and habits.
It is about gold investments.
Let’s understand this better.
Before we do so, here are our recommended brokers who can help you invest in gold and gold ETFs. If you want to know about the gold rate today or the gold price today, then we suggest you open an account with at least 2 of them and then check how comfortable you are with how the platform tracks gold rates. Then you may pick one platform you like for all your investments.
Gold as an Investment
Investors usually buy the precious metal to diversify risk, as the prices move differently from equity markets. Some can even say that they move in opposite directions.
Compared to other precious metals used for investment like silver and platinum, gold has the most leverage as a trustworthy safeguard for your money. It is a strong shield against inflation as its limited supply means the metal appreciates in line with a general rise in prices.
Types of Gold Investments
Perhaps one of the oldest forms of investment, you can buy physical gold in the form of jewellery or bullion, i.e. gold bars and coins. Though gold jewellery is usually purchased for personal consumption, the survey we did before we launched this course told us that many of your fellow course members saw the metal help their families survive through hard times.
Physical gold is likely to see growth as it gives an immediate assurance of safety of our investment and wealth. The World Gold Council says that the global demand for bars and coins has quadrupled since the early 2000s.
In terms of choices between different types of physical gold, bullion is a smarter investment as the making charges for the jewellery, which can be as high as 10-15% of the price of gold, does not increase the cost of ownership. Gold coins and bars are available through any designated outlets of Metals and Minerals Trading Corporation of India (MMTC) and specified bank branches and post offices. You can also buy gold from jewellers. All you need to ensure is that the gold has the hallmark sign for purity.
You can buy digital gold online through institutions, broking houses and payment platforms such as Zerodha, m.Stock, ICICI Securities, and so on. Most of these institutions also allow you to sell or gift the gold at any time through their platform.
The most reliable option to buy gold in this format is offered by MMTC-PAMP Pvt. Ltd., a joint venture between MMTC Limited of India and PAMP SA, a Switzerland-based bullion brand. Under the scheme, you can accumulate gold by regularly buying it at a value starting from Rs. 1,000.
The fully insured gold is kept in the custody of MMTC-PAMP and you need to take delivery within 5 years of your investment in the form of physical gold coins of denominations starting from 1 gm.
Gold Exchange-Traded Funds (ETFs)
Gold ETFs are exchange-traded funds that invest 90% of their corpus in physical gold that is 99.5% pure. The rest of the investments are in debt instruments. One gold ETF unit is equal to one gram of gold. The physical gold is held with the custodian bank and valued periodically, as per Securities and Exchange Board of India’s (SEBI) guidelines.
The gold ETFs are listed on the BSE and NSE that makes it easy for you to buy and sell them in quantities lower than what you would have to for physical jewellery, bars and coins. Like stock trading, you need a Demat account and a trading account to buy and sell gold ETFs. One thing you need to remember is that these investments are subject to tax on redemption.
Gold funds invest in the shares of companies that operate in gold and allied services. Gold funds, unlike gold ETFs, are managed by fund managers just like mutual funds. They are said to be ideal for risk-averse investors as they invest in multiple companies to reduce risk.
To an extent, the returns from gold funds depend on market conditions. Since the companies that operate in gold and allied services are affected by other factors besides the price of gold, the returns are not exactly similar to that of gold.
Gold Fund of Funds
Also called Gold Saving Funds, the Gold Fund of Funds are mutual funds that invest in gold ETFs. Since they invest in quite a few ETFs to diversify holdings and reduce risk, they are considered better than individual gold ETFs.
Investors do not need a Demat account to invest in these financial instruments. Unlike Gold ETFs that usually do not have a systematic investment plan (SIP) or else ask the investor to specify the number of units to be bought at the outset, Gold Saving Funds allow investors to buy gold ETFs of a fixed amount per month (or at a regular interval of choice) without any of these constraints.
Gold Mining Shares
You may also invest in shares of gold mining companies from the secondary equity markets. The prices of these companies move like all other company shares listed on stock exchanges. As a trend, the share prices move in tandem with a rise in global gold prices.
Since these are equity shares, you will need to have a Demat account and a trading account before you can invest in these shares.
Government Sovereign Gold Bonds (SGBs)
Sovereign Gold Bonds (SGBs) are issued by the Reserve Bank of India on a regular basis. The issues may be done in tranches every 2-3 months, with each tranche remaining open for around a week each time. The prices are calculated through a simple average of the closing prices of 999 purity gold for the last 3 days as set by the Indian Bullion and Jewellers Association (IBJA).
The government offers a nominal coupon rate that helps you get more returns over and above the price appreciation you will get. These bonds have a tenure of eight years, with an exit option in the fifth, sixth and seventh years. They are tax-free on redemption though the interest you earn is taxable. You can also sell them on the secondary market. The Sovereign Gold Bonds are suggested as long-term investments.
The subscription is made as grams of gold. An individual investor or a Hindu Undivided Family (HUF) can invest a minimum amount that is equivalent to the price of 1 gram of gold, and maximum limit is set at a value equal to 4 kg of gold. Corporations and trusts can invest up to 20 kg.
Gold is considered a good investment if you use it to diversify your portfolio. Most experts suggest that you keep 10-15% of your investments in gold. This is sound advice if you see that gold has given an average return of 14.10% annually since 1973 in rupee terms, as per the World Gold Council Report dated 24th March 2020.
The price of gold rises during moments of uncertainty. And since economic uncertainty will be the norm due to the Coronavirus pandemic in the near future, most experts are betting on the price of gold to rise.
What you need to see is your comfort factor with the different types of investment. You will also need to assess the time you want to stay invested. Except for physical gold, all are options you can trade in the market. So trying it out with a small amount at first and then going for bigger amounts is a good idea.