Gold is one of the most expensive substances in the world. Historically, gold has been respected across civilizations, and even been used for barter and trade. It is a famous story that when Spanish explorers first arrived in the “New World” and met the native people of South America, they saw a very different yet similar culture. Even though separated by a vast ocean, both the cultures (completely unrelated to one another) seemed to hold gold in high esteem.
Even today gold is held in an equally high esteem and is used to make jewellery, Olympic medals, awards for Grammy, Oscars and statues of worship. It is observed that gold is used to signify power, beauty, richness and strength all over.
Reports show that most of the gold that is mined is used in the manufacture of jewellery. In 2019, about 48.5% of the global gold demand was from the jewellery industry. As far as investment is concerned, gold became the best performing asset class in the past year with a return of close to 40%.
With the start of the Indian festive season, millions of people will be flocking to purchase gold for good luck. The appreciation in the value of the metal makes it an evergreen purchase. Do you plan on buying gold as well? If yes then it’s a great call, and we are totally behind you on this one! Here are the 5 different ways to buy gold:
Table of Content
- 1 1. Physical Gold
- 2 2. Gold ETFs
- 3 3. Gold Mutual Funds
- 4 4. Sovereign Gold Bonds
- 5 5. Digital Gold
1. Physical Gold
Physical gold is the most famous way of buying gold in India. The shine and charm of the yellow precious metal in its most tangible form is a popular purchase during festive season and wedding season. Physical gold can be bought in the form of gold jewellery, gold biscuits, gold coins, etc. It is one of the few assets which can be kept confidential and completely private unlike other forms of gold.
Another reason why people like purchasing physical gold is because it can be bought without the help of a broker or 3rd party associate to fulfil the contractual obligation of purchasing the asset, hence, no risk is involved. Physical gold is universally accepted as money, which means that in times of need one can always sell their gold biscuits, gold jewellery, or gold coins to get instant cash.
Advantages of Physical Gold
- Highly Liquid: Physical gold is readily in demand and can instantly be converted to cash at any jewellery store.
- Loan Collateral: Physical can also be used as collateral for secured loans very easily.
- Protects Against Inflation: Gold is an ideal hedge for financial market risks and protects you against inflation.
- Next Generation: You can happily pass on physical gold like jewellery and coins to the next generation on special occasions like weddings and festivals.
Disadvantages of Physical Gold
- Risk of Theft: Keeping gold in physical form always means that one is at a risk of a theft or robbery which is risky business.
- Making Charges: Buying gold jewellery then involves paying for making and designing charges which also in turn, increase the cost of gold.
- Storage Charges: In case you decide to keep your physical gold safely in a locker, you will have to pay for the storage cost as well.
2. Gold ETFs
Gold ETFs or Exchange Traded Funds have recently become a very popular way to buy gold. When people don’t want to go through the hassle of purchasing physical gold, they put their money in paper gold like gold ETFs. ETFs or Exchange Traded Funds function like individual stocks and can be traded easily on the stock exchange anytime during market hours. In this case, the investor invests in stocks instead of the actual metal which when traded generates a unit’s equivalent in cash instead of actual gold.
Reports show that in 2020, gold ETFs have been a popular option for investment, even more so than gold funds. As per Economic Times, “Gold ETFs saw an inflow of Rs 921 crore in July, a surge of 86% from the preceding month.”
Advantages of Gold ETFs
- Long Term Investment: Each ETF unit represents 1 gram of 99.5% pure gold, which makes them ideal long-term investments. They are especially useful if an individual opts to invest large sums and trade systematically.
- Lesser Commissions: Purchasing and trading Gold ETFs is cheap since there is no entry or exit load involved. One only has to pay 0.5%-1% brokerage on transactions.
- High Liquidity: Gold ETFs don’t have any exit loads which means that investors can buy or sell ETF units at any time during the market hours and get money. This makes Gold ETFs highly liquid.
- Loan Collateral: One of the lesser known facts about Gold ETFs is that they can be used as collateral for secured loans.
Disadvantages of Gold ETFs
- Market Risks: When you are investing in Gold ETFs you can’t ignore the market risks attached to them.
- Demat Account Costs: In order to buy Gold ETFs, you need to pay the account costs and annual maintenance.
3. Gold Mutual Funds
Gold mutual funds are open-ended investment products that invest in gold ETFs. Their Net Asset Value or NAV is linked to the underlying ETF’s performance. As explained in the last section, gold ETFs invest their corpus in gold bullion of 99.5% purity to earn a return over it. Remember that there is an indirect link between gold mutual funds and the physical gold prices in the market. Any fluctuation in physical gold prices impacts the gold ETFs, which, in turn, impact the NAVs of the gold mutual funds.
A person can easily invest in gold mutual funds directly through online mode or their distributors without having a Demat account. Gold mutual funds offer all the benefits of buying gold without the pressure of taking care of the safety, making charges and other costs.
Advantages of Gold Funds
- Transparent Investment: Securities and Exchange Board of India (SEBI) regulates gold mutual funds and even measures and predicts their returns which makes them one of the safest investment options.
- Highly liquid: Gold mutual can be liquidated at short notice and without much hassle.
- Diversify Portfolio: Experts recommend investing in gold mutual funds to diversify one’s investment portfolio and reduce overall market risk. Diversify your portfolio with 10% to 20% investment into gold funds.
Disadvantages of Gold Mutual Funds
- Higher Expense Ratio: The cost involved in buying gold mutual funds is higher as compared to that of Gold ETFs.
(Read More: Best Performing Gold Mutual Funds)
4. Sovereign Gold Bonds
Sovereign Gold Bond or SGB is issued by RBI (Reserve Bank India) on behalf of the Government of India. The bonds are denominated in multiples of grams of gold with a basic unit of 1 gram and the minimum permissible investment is 1 gram.
Sovereign Gold Bonds this year offer the investor an annual interest rate of 2.50%. SGBs have a maturity period of eight years with an exit option after the 5th year. Since these bonds are to be listed on the stock exchanges, they track the prices of gold. This means that the redemption price is based on the then prevailing price of gold.
Advantages of Sovereign Gold Bonds
- Tax Free: Sovereign Gold Bonds are completely tax free at the time of maturity. In fact, there is no tax deducted at source on the interest paid.
- Long Term Investment: Since SGBs have a maturity tenure of 8 years with an exit option after 5 years, they form an attractive long term investment option.
- Earn Interest: These bonds pay interest and there is almost zero cost to hold on to them as compared to the expense ratio one pays for gold funds.
Disadvantages of Sovereign Gold Bonds
- Difficult Trading: While these bonds are listed on the stock exchange, there is no guarantee that one will be able to trade them near the fair value.
- Less Liquidity: SGBs have a maturity period of 8 years with an exit option available ONLY after 5th year. This makes them less liquid as compared to Gold ETFs or Gold mutual funds .
5. Digital Gold
Digital gold is basically gold that can be bought online and stored in insured vaults by the seller on behalf of the customer. E- wallets like Paytm, Phone Pe, Google Pay have the option for investors to buy digital gold, and so do brokers like HDFC Securities and Motilal Oswal have. One just needs an internet connection and an e-wallet to buy Digital gold anytime and anywhere.
When you invest in digital gold, what happens is that your trading company purchases an equivalent amount of physical gold in your name and stores it in secured vaults. Once you purchase, your account is instantly updated and can be accessed 24×7. You are free to sell the gold whenever you want to earn a profit. In fact, you can choose to sell the gold digitally to the platform itself or request doorstep delivery of your gold in the form of coins or bullion.
Advantages of Digital Gold
- Convert to Physical Gold: Digital gold can easily be converted to physical gold and be delivered at your doorstep.
- Highly Secure: Digital gold is kept in highly secure, 100% insured vaults and can also be converted to physical gold. It’s almost as if you own physical gold but without the added pressure of taking care of its security personally.
- Loan Collateral: Like Gold ETFs, Digital gold can also be used as collateral for secured loans.
Disadvantages of Digital Gold
- Paying GST: Buying Digital gold means you need to pay 3% goods and services tax (GST) just like in the case of buying physical gold.
- Holding charges: If you are buying gold from SafeGold using PhonePe, then you might have to pay storage charges. The rules are: No charges for the first 2 years. After 2 years of purchase, if the amount of gold is less than 2 grams, then a fee of 0.05% is charged every month.
- Limited Holding Period: You can hold Digital gold in a storage locker for only a certain number of years after which you will have to either sell it back to the seller itself or convert it into physical gold. For eg. after 5 years, MMTC-PAMP investors will have to pay extra charges decided by MMTC-PAMP if neither the gold is sold back to them nor the delivery taken by the investor.
This concludes the list of different ways to buy Gold. We hope you found the perfect option of buying gold as per your convenience. Grab all the gold you can this festive season – Happy Diwali 2020 to you and your folks!