Before investing any money, it is important for an investor that his/her goals are set. An investor has many options available with him for investment.

Investing in capital markets, fixed income instruments, fixed and recurring deposits, gold etc. are the various options available with an investor.

Investment in gold can be made in various forms like gold bullions and jewelry, Gold ETF and Sovereign Gold. After deciding to invest in gold, an investor should decide from the available options to invest in.

Why Gold?

So, in order to diversify and make sure that money also grows, he/she should invest in different instruments.

In a country like India, which is one of the largest importers of gold, people value gold a lot and prefer to invest in it, not just for the purpose of diversification but also buy gold on festivals and important occasions.

Investing in gold also helps reduce the overall portfolio volatility.

Gold has an inverse relationship with equity markets. If the equity markets become bearish then people start investing in gold and it is generally seen that gold would have performed well at that time.

What Documents are Required for Investing in Gold?

If an investor is investing in physical gold like gold bars, gold coins, jewelry above Rs. 2 lakhs, then the only thing that the investor needs is his/her PAN Card.

So, the investors must have their PAN cards before investing in gold.

Investing in Exchange Traded Funds will require the investor to open an account with a brokerage firm. He/she will also need to open a demat account with the same brokerage firm.

How Can You Buy Gold?

Buying Gold is very easy.

An individual should keep in mind his/her purpose for buying gold and then decide whether to buy gold coins or jewelry.

If the individual intends to buy gold for the purpose of investment then gold coins would be the apt choice, as it does not involve a charge.

To Invest in Gold ETF, all one needs is a demat and a trading account which has already been mentioned earlier. The documents required to open a demat and trading account are PAN card, identity proof, and address proof.

Once the investor has got the account ready it is just a matter of choosing the Gold ETF he intends to invest in and place the order online from the broker’s trading portal.

Few of the listed Gold ETFs are Goldman Sachs Gold ETFs, Kotak Gold ETF, SBI Gold ETF etc.

Difference Between Physical Gold and Gold ETFs

Gold Gold ETFs (Exchange Traded Funds)
Investment is made in physical gold The investor invests in a proportionate value of gold but this investment is not in the physical form
Demat account is not needed to invest in Gold The investor needs to have a demat account to invest in Gold ETFs
Market fluctuations directly affect the prices of Gold Changes in the price of gold affect the prices of Gold ETFs
No additional charges involved other than the physical gold itself. Making charges are involved in case jewelry is being purchased Investing in Gold ETFs involve asset management and brokerage charges
The buyer is prone to  risks of theft related to storing physical gold Gold ETFs does not involve trading gold in the physical form and hence there is no risk of theft
No paperwork is needed for investing except PAN is needed when gold is purchased above a specified limit Paperwork is needed for investing in Gold ETFs
Systematic Investment Plan (SIP) is not available No Systematic Investment Plan (SIP) option available

 

Best suited for conventional investors Best suited for  investors who have the required time and skill set to trade

Why Invest in Gold ETF and Sovereign Gold?

Gold is considered as a Global Asset Class and there are various reasons why GOLD ETF is a must in retail investors portfolio, and how they are better than traditional forms of investing in Gold. Gold ETF is a transparent instrument and provides an effective and efficient platform for small investors to diversify their investments by investing in gold.

There is no worry on adulteration possible as it is held in an electronic form. This helps in tracking the investment values in real time and is extremely liquid.

The expenses incurred in buying and selling Gold ETF are lesser than the cost incurred in buying and selling physical gold.

Sovereign gold bonds offer various benefits to the investor. There is no expense ratio involved, unlike gold ETFs or gold funds.

All bonds provide a small interest to its investors in the range of 2.5% to 2.75%. This taxable interest is given to the investors on the face value of the bond Now since its market price is less, the actual running yield is higher and ranges somewhere from 2.8% to 3.2%.

Is Gold the Millennial Way of Investing?

The discount is available on these bonds when there is low liquidity and therefore, only investors who can hold till maturity should get in here.

Else, they may also be forced to sell at a discount. Long-term capital gain from these gold sovereign bonds are tax-free if held till maturity. This gives investors one more reason to hold till maturity, as they will be charged lesser tax on long-term capital gains.

What Affects Gold Prices?

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Inflation has a role to play in gold prices.

When inflation increases, the value of the currency falls and therefore people tend to hold money in the form of gold.

Therefore, in times when inflation remains high over a longer duration, gold becomes a tool to hedge against inflation. This pushes gold prices higher in this period.

The next thing that affects gold prices is the interest rate. There is a negative relationship between gold and interest rates. Rising yield shows an expectation of strong economy.

Strong economy results in inflation and gold is used as a tool to hedge against inflation.

Also, when interest rates increase, investors start investing in fixed income securities that yield a fixed return, unlike gold, which does not carry any such return.

So, the demand for gold falls when price remains the same.

The rupee-dollar rate has a role to play in Indian gold rates although it does not impact global gold prices.

Gold is heavily imported and hence if the rupee weakens against the dollar, gold prices will increase in rupee terms. So, a depreciating rupee may dent the demand for gold in the country.

However, remember the change in rupee-dollar rates has no impact on gold rates denominated in dollars.

The central banks of a number of countries hold gold reserves as well as currency. Every time the central bank of a large country start holding reserves, the price of gold increases.

This happens because of the decrease in supply of gold which raises the flow of money in the market.

Gold Mutual Funds in India

How Is Gold taxed?

The taxation of physical gold depends on how long a person has held gold jewelry or coins. The capital gains from the sale of gold will be short-term or long-term depending on the duration for which the gold has been held.

Short-term capital gains will arise if the difference between the date of purchasing and selling the gold is less than three years. Such short-term capital gains will be added to the gross total income of the assessee and taxed at the income tax rates applicable.

Long-term capital gains tax is charged when the difference between the date of buying and selling exceeds the period of three years. These gains are taxed at 20 % along with surcharge if any, plus cess at 4 % with the indexation benefit.

Also, one should remember that he will be charged Goods and Service Tax at the time of purchasing the gold. The GST is charged at 3 % on the value of gold plus making charges.

The taxation of gold mutual funds and gold ETFs at the time of redemption is the same as selling gold jewelry.

Taxation of returns from Sovereign Gold Bonds is different. These bonds earn an interest of 2.5 % per annum. Interest earned from these bonds will be taxable under the head Income from Other Sources and taxed at the rates applicable to the income of the assessee.

The maturity amount that the person will receive after 8 years is linked to the gold prices available at that time in the market. In the case of these bonds if any capital gains arising at the time of maturity, then those will be exempted from tax. An investor also has an option to exit from the scheme after the expiry of lock-in period of five years.

If the investor exits from the scheme after five years, any capital gains arising from such a sale will be taxed as long-term capital gains at 20 % with the benefit of indexation.

Conclusion

An investor first needs to decide whether he/she wants to invest in gold or not.

In today’s day and age, there are many more options to invest in gold apart from physical gold. Therefore, analyze your risk appetite and, see if you want to invest in this instrument and then choose the adequate option.

Disclaimer: The views expressed in this post are that of the author and not those of Groww