Indians love buying gold, and bought over 500 tonnes of gold in 2020. Let us get the maths around it. At the rate of Rs 47,000 per 10 grams of gold, Indians bought gold worth Rs 2.3 lakh crores during the last year. Or, approx. $30 billion worth of gold (at an exchange rate of USD 1 = Rs 77). That is quite a lot of purchases for the precious yellow metal. If that is not enough, the gold demand last year was the lowest in the decade that just passed. Gold purchases crossed a thousand tonnes in one of the years during the last decade. In other words, buying gold is an important investment aspect in our lives. And this article is all about understanding different ways to buy and invest in gold in 2021.
Are you amazed by the gold demand in India? Who consumes so much gold every year? Here is a broad demand pattern. About a third of the total orders come from the jewellery sector. Nearly half of the gold demand is for investment purposes (in the form of coins, physical bars, etc.). The balance gets consumed in the industries and the manufacturing sector, the central banks and other miscellaneous needs.
In conclusion, it’s fair to assume that Indians buy (and consume) a lot of gold each year. We can confidently say this even without comparing the gold spend with expenditure on other discretionary purchases like apparel, electronics, automobiles, etc.
Gold jewellery, an investment and as well as an emotion
Gold finds its use in jewellery as wearable. Regular and occasional. In addition, investment in gold is utterly typical for households during festivals and celebrations. In this case, the yellow metal may be in the form of an ornament or bullion.
A family gold reserve is often a matter of pride. It acts as a reserve to tide over financial uncertainties if they arise. Thus, having gold has served as a financial support system for ages and across generations in India. Therefore, gold is considered almost sacred and is an emotion, much more than just an asset.
However, from a financial planning perspective, gold is like any other investment avenue. Therefore, any investment should be a part of a well-defined asset allocation strategy. Read more about the various assets available for portfolio diversification.
Ways to own and invest in gold
Generally speaking, there can only be two ways to invest in gold – physical or paper/online/digital. Physical ownership can primarily be in the form of jewellery, coins, and gold bars. One can acquire paper, online or digital gold through Exchange-traded funds (ETFs), Sovereign gold bonds (SGBs), etc. Another digital format is to invest in gold through mutual funds.
Let us discuss each one of the forms of ownership here in detail.
In line with where we began this note, we Indians love buying gold, and within that, jewellery. One can purchase jewellery from local shops, multi-brand retailers, or company-brand chains.
Buying jewellery comes with an additional cost of making the same. The making charges vary hugely based on the seller and are purely an incremental cost. These charges are irrecoverable when you sell.
The risks of safety and holding costs apply in the physical ownership of gold exists here as well.
The government of India launched minted coins that have the face of Mahatma Gandhi on one side and an image of Ashok Chakra on the other. Investors can purchase gold coins from various sources, like jewellers, banks, non-banking financial institutions, and e-commerce websites.
These coins are available in the denomination of 5gm, 10gm, and bars of 20gms. The small denomination coins allow broader participation in the purchase of gold coins.
The Indian Gold Coin and Bar are 24karat pure and of 999 fineness. These carry advanced anti-counterfeit features and have tamper-proof packaging. The Bureau of Indian Standards (BIS) hallmark the coins. Metals and Minerals Trading Corporation of India (MMTC) fixes the price of these coins.
Key features are:
- The gold coin is pure
- Coins are tamper-proof by design and have anti-counterfeit features to avoid duplication
- MMTC fixes prices, so it is easy for customers to buy/sell the coins in the open market
Gold Savings Scheme
A gold savings scheme is like a recurring deposit created in a bank. Investors deposit a sum of money every month for a specified tenure. In the end, the investor can purchase gold in the form of jewellery or bar from the concerned jeweller.
What is different from the recurring bank deposit is the end game. Here you end up purchasing gold. Unlike a bank deposit, a gold savings scheme does not earn you interest. Instead, jewellers payback by either waiving off the final instalment or provide a cash incentive equivalent to 50-75-100% of an instalment amount.
For instance, let us say Mr Goldie starts a gold savings scheme with Rs 10,000 per month for 12 months. At the end of 12-months, Mr Goldie will be eligible for an incentive of 90% of the instalment value. In the 13th month, Mr Goldie can purchase gold of value Rs 1,29,000 (10,000 X 12 = Rs 120,000 + 90% of 10,000 = Rs 9,000).
In the above-cited example, Mr Goldie completed the scheme’s tenure and was eligible for 90% incentive value. However, when an investor would like to discontinue the plan earlier, jewellers apply lower incentives rates.
Gold ETFs (Exchange Traded Funds)
These mutual funds invest in gold. The ETFs behave like stocks and trade on the stock exchange. ETFs represent assets, and in this case, it is gold. Investors do not invest in gold directly but in ETFs that represent gold.
Investment in ETFs allows investors to take exposure in commodity sectors like gold without actually buying the metal. As a result, the ETFs are relatively simpler to own and provides a more accessible alternative to invest in gold.
Since ETFs trade as stock in the market, investors can use them as a tool to hedge. For example, one can short gold ETFs if we expect gold prices to fall.
Keep in mind, although ETFs allow flexibility, investors do incur some management fees, albeit low. More about ETFs here.
Sovereign Gold Bond (SGB)
The Government of India announced the first Sovereign Gold Scheme in November 2015. And there have been several series since then. The government open the schemes in tranches, and currently, the 2021-22 Series is ongoing. Here you can read about the features and advantages of this scheme.
Salient features of the SGB scheme:
- The Reserve Bank of India issues the gold bonds on behalf of the Government of India
- Resident individuals, HUFs, Trusts, Universities and Charitable institutions are eligible to purchase
- Bond tenor is 8years, with an exit option available after 5years
- SGBs are tradable on stock exchanges
- The gold bonds issued are in the form of a Stock Certificate and are transferable
Gold Accumulation Plan (GAP)
MMTC-PAMP is an industry leader in India that brings global standards to the Indian precious metals sector. The company has developed a Gold Accumulation Plan (GAP) to enable the gradual purchase and accumulation of gold.
The gold offered is pure. Furthermore, the gold purchased is set aside in an MMTC-PAMP vault, fully secure and insured. As a result, investors can accumulate gold in their metal account and continue to do so until they want without fear.
The plan is flexible and allows investment in the small denomination, and there is no obligation to make periodic purchases. Further, investors can seek the physical delivery of gold in the form of coins or bars as per their discretion.
Gold mining companies
Investing in companies that specialize in gold mining is an indirect way to take exposure to the yellow metal. In this method, what you get are shares of the company and not precisely the yellow metal. However, the underlying value driver, to a great extent, is still gold prices.
These companies profit with increasing gold prices and vice versa. However, as you can imagine, these are corporates and implement their hedging practices. So, not necessarily the value goes down with a decline in share prices. Direction can be the same, but the extent (or delta) can be different. In the case of efficient companies, the delta will mostly be in favour of the investor.
However, investing directly into shares of the company requires thorough research. And the process is time-consuming. Therefore, this method is often considered riskier and is not feasible for many investors.
How to make the correct choice amongst the various modes of investment
As we elaborated above, there are different ways to buy and invest in gold. Each method has its advantage. We lay down a few pros and cons of each form of ownership below. The final choice remains with the investor and depends on the needs and usage of the gold.
Physical gold allows the investor to keep the metal in their custody, and one can see it tangibly. However, physical possession of this precious asset comes with a holding cost. Digital or paper gold, on the other hand, is virtual. Jewellery can be costly due to the making charges, which usually is a sunk cost. However, there is no such cost in coins, bars in the physical format (or very limited, if at all) or digital form.
The digital format allows investors to purchase in smaller quantities or amounts. Splitting to that level is difficult in the case of physical gold. To manage investment in digital format does require a slight bit of technological understanding. Investors who are uncomfortable with digital ways may still choose physical form ignoring the advantages digital format brings.
Gold bonds earn an interest of 2.5% per annum fixed, and gains on SGB upon redemption are tax exempted. This concession makes them highly tax efficient. The downside, however, is the lock-in period.
ETFs provide liquidity, can be traded on the stock exchange and can be used as a hedging instrument. Also, there are no storage risks either. However, gains from the sale are subject to taxes.
In conclusion, be clear about why you want to invest in gold. For example, is there an objective you would like to meet (e.g. gift, marriage, etc.), or is the purpose only purely investment. In the latter case, total investment in one asset class (gold in this instance) should not be more than 10% of the entire portfolio value. Do consult with your financial advisor for guidance before in case unclear about the investment.
About the author
The author is a senior finance professional with over fifteen years of work experience in corporate finance. He has an affinity for matters relating to personal finance and investment management. Through his writing, the author wants to share his knowledge and understanding of the subject.
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