This article talks about various gold investment products that are available in India.
Gold is a popular investment option among people, particularly in India. It is characterized by high liquidity and inflation-beating capital appreciations. Gold prices face less volatility, and it performs well during market turbulences. Investment in gold is not only limited to buying jewelry and coins i.e., physical gold, but one can invest in gold through numerous other ways such as digital gold, Gold ETFs, gold mutual funds, and so on. Every investor is advised to have gold in their investment portfolio as it is considered safe and liquid and gives decent returns. Gold also gives investors the benefit of diversification by balancing their portfolio risk as it has an inverse relation with equity investments. Here are some of the popular options to invest in gold.
Gold Exchange Traded Fund (ETF) is an investment product that mixes the flexibility of the share market and simplicity of the gold investments. These instruments trade on the cash market of the stock exchanges like any other stock. Gold ETFs are based on gold prices and are considered a passive investment product. As its pricing is directly related to gold prices, it leads to complete transparency in trading in Gold ETFs. The trading or investment-related expenses of Gold ETFs are much lower as compared to physical gold investments. Gold ETFs simply represent physical gold which is in dematerialized form. One unit of Gold ETF is equivalent to one gram of gold and is backed by high purity physical gold (99.5% pure physical gold bars).
E-Gold refers to the gold that can be purchased in electronic form. It can be purchased in the units like stocks. E-gold can be bought unit-wise, where 1 unit is equivalent to 1 gram of gold. Investors can hold the gold bought in Demat form or can convert it into physical gold at any time. To invest in E-Gold, one requires a trading account with the specified National Spot Exchange dealers. The biggest benefit of E-Gold is its convertibility into physical gold. Investors can make long-term investments through E-gold and keep their gold safe in their Demat account. Later, when their targets are achieved, they can easily take physical delivery of gold or can sell the electronic units. This gold investment option also provides transparency in transactions and uninterrupted trading.
Sovereign Gold Bonds
The Indian Government introduced the Sovereign Gold Bonds (SGBs) as an alternative to physical gold to the investors. As SGBs are government securities, they are considered safe and secure. The value of SGB is designated in the multiples of grams of gold. To invest in SGBs, investors need to approach a SEBI registered agent or broker and can also purchase these bonds through their bank accounts. When investors invest in gold bonds, they receive a paper against their investment. On maturity, investors can redeem these bonds for cash or can sell these bonds at prevailing market prices before maturity. SGBs are available in digital and dematerialized form and can act as collateral for loans. Apart from capital appreciation benefits, these bonds also earn additional interest of 2.5% per annum.
Gold Mutual Funds
Gold Mutual funds is an investment scheme that does not directly invest in physical gold but takes the same position indirectly by investing in gold ETFs and related assets. Investing in gold mutual funds carries certain benefits. Investors do not necessarily require a Demat account. Investors also do not need to buy the complete units as required in the case of ETFs. Investors also have the option of a Systematic Investment Plan (SIP), where they can invest a certain amount on a periodic basis.
Investment in physical gold is generally made by buying gold in the form of bullion, bars, coins, or jewelry. Investors are more inclined towards investing in gold in this format as gold bars and coins are considered the purest physical form of gold. Investors do not require a Demat account to buy physical gold. These are best suited for conventional investors as these are easily recognizable and it is easier to find buyers. Investment in physical gold suffers from some limitations as well. There is a high risk of theft and high storage costs associated with physical gold.
Gold ETF Vs. Physical Gold Vs. Gold Mutual Funds
|Basis||Gold ETF||Physical Gold||Gold Mutual Fund
|Investment is made in the proportionate value of gold but not in physical gold. Investors buy units of ETFs.||Investors purchase physical gold in the form of bars, coins, bullions, or jewelry.||Investors buy units of gold mutual funds which in turn makes an indirect investment in gold.|
|Investors require Demat account to invest in Gold ETF||Investors do not require a Demat account to invest in physical gold.||Investors do not necessarily require a Demat account to invest in gold mutual funds.|
|Changes in gold prices affect the price of gold ETFs.||There is a perfect correlation as price fluctuations in gold directly affect the price of physical gold.||Changes in the gold price indirectly affect the price or NAV of the gold mutual funds.|
|Gold ETFs involve few additional charges like asset management and brokerage fees.||There are no additional charges involved in purchasing physical gold.||There are some additional charges involved with investing in gold mutual funds.|
Risk of Theft
|As Gold ETFs are traded in dematerialized form, it eliminates the risk of theft and minimizes the storage cost.||Investment in physical gold involves the risk of theft and involves a storage cost.||Gold mutual funds eliminate the risk of theft and storage costs.
|The option to invest through SIP is not available.||There is no SIP option while investing in physical gold.||Investors can opt for SIP and thus can invest in gold through a systematic plan.|
|Investing in Gold ETFs is best suited for investors having the required time and skillset to trade.||Investing in physical gold is best suited for conventional and traditional investors as they can easily be recognized.||Investing in gold mutual funds is best suited for investors looking for calculated risk and high returns but do not have time to actively participate in the market.|