From Jewel Box to Market: 5 ways in which you can invest in gold

The latest series of Sovereign Gold Bonds (SGBs) released between December 18 and 22, 2023, has sparked a revived interest and contemplation among investors regarding gold-oriented investments. For those unfamiliar, SGBs are government securities measured in grams of gold. These bonds act as an alternative to possessing physical gold, representing not just the prevailing market value of gold upon maturity but also being tradable on the stock exchange.

Throughout periods of economic turbulence, gold has consistently demonstrated its value as a significant investment, owing to its extensive historical track record. During market fluctuations and economic uncertainty, investors commonly gravitate towards safe-haven assets such as gold, anticipating the preservation or potential appreciation of value. This heightened demand results in price increases.

The ongoing rise in gold prices over the years, combined with the allure of this precious metal, is prompting individuals to explore diverse avenues for investing in it. These include:

Gold bullion

For traditional investors, physical gold stands out as one of the most suitable investment options. This is particularly true because acquiring physical gold doesn’t involve the intricacies of a demat account or extensive paperwork, making it accessible to individuals unfamiliar with conventional investment procedures. Additionally, possessing physical gold offers a sense of security and control, a tangible aspect absent in virtual assets, as you can physically hold it in your hands.

Gold exchange-traded funds

Gold exchange-traded funds (gold ETFs) serve as a commendable alternative to physical gold. Operating akin to stocks, they facilitate easy buying, selling, and management of your investment, thereby negating the necessity for physical storage or concerns regarding purity. These ETF investments boast high liquidity, enabling swift transactions of buying or selling holdings on stock exchanges. In contrast to physical gold, ETFs typically incur lower transaction costs and eliminate the need for additional expenses such as insurance or secure storage. Investors can allocate their funds in smaller gold amounts with these ETFs, starting as low as 1/10th of a gram, thus broadening accessibility for a diverse range of investors.

Gold funds

Gold mutual funds present an enticing option for investors seeking exposure to gold without the complexities of physical ownership or the intricacies of gold ETFs. Notably, no demat account is necessary, rendering gold funds accessible to a wider array of investors compared to ETFs. In contrast to physical gold or even individual ETF units, gold mutual funds enable you to initiate modest investments starting as low as ₹500 through SIPs, catering to budget-conscious investors. Typically, these funds invest in a diversified portfolio of gold ETFs, offering inherent diversification and mitigating some risks associated with a single gold holding. With active management by fund managers overseeing the buying and selling of gold ETFs, these funds save you time and effort.

Sovereign Gold Bonds

Released by the Reserve Bank of India (RBI) on behalf of the Government of India, Sovereign Gold Bonds (SGBs) provide a notable level of safety and security in contrast to physical gold. Concerns about theft, loss, or insurance expenses related to storing physical gold are alleviated. At maturity, you receive the precise quantity of gold you initially invested in, shielded from market fluctuations. The 2.5% annual interest offers an additional yield on your investment, even in the event of a stable gold price. These bonds can be easily held in demat form, streamlining transactions and eliminating charges for transactions and worries about purity.

Difference of risks in gold investments

In contrast to SGBs or gold ETFs, storing physical gold introduces the risks of counterfeiting and theft. Securing your investment requires expenditures on reliable storage solutions and insurance, contributing to the overall cost. Moreover, transactions involving the purchase and sale of physical gold typically incur additional charges, which can diminish your returns. Additionally, selling physical gold may entail a more prolonged process and demand extra effort compared to the easily tradable nature of gold-backed securities.

Engaging in ETF investments necessitates the possession of a demat account, potentially entailing additional paperwork and fees. Gold ETF prices closely mirror the underlying gold price, exposing them to market volatility. Although their costs are lower compared to physical gold, ETFs come with annual fund management fees that can erode your returns.

Yet, investors allocating funds to gold mutual funds express concern about expense ratios and transaction fees that diminish their returns, especially in smaller investments. Additionally, unlike the direct ownership of physical gold or direct investment in gold ETFs, gold funds offer indirect exposure, potentially introducing an additional layer of risk associated with the fund’s performance and tracking error. Furthermore, while gold mutual funds are generally more liquid than physical gold, they may not provide the same level of immediate buying and selling flexibility as gold ETFs.

Regarding SGBs, although the gold quantity is safeguarded, the redemption value is contingent on the market price at maturity, posing the risk of potential capital loss in the event of declining gold prices. Additionally, these bonds come with a five-year lock-in period and offer limited exit options before maturity. When compared to physical gold or ETFs, SGBs may exhibit slightly lower liquidity.

How are gold investments taxed?

Gold investments entail varying tax implications depending on the chosen investment vehicle and the duration of holding.

Take, for example, the details of taxation on purchasing physical gold.

• A 3% goods and services tax (GST) is applied to the buying price of physical gold.
• Additional making charges, if any, are also subject to GST.

However, the rules of taxation differ in selling physical gold investments.

• Short-term capital gains (holding period less than three years) are taxed based on the investor’s income tax slab. For instance, if you belong to the 30% tax bracket, your short-term capital gains from selling gold would be taxed at 30%.
• Long-term capital gains (holding period exceeding three years) are taxed at a flat rate of 20%, with the benefit of indexation to account for inflation and additional levies like surcharge and cess.

Gold ETFs follow a taxation structure akin to physical gold, contingent on the holding duration. Profits from the sale of gold ETF units within three years are classified as short-term capital gains and are subject to taxation based on the investor’s applicable income tax slab.

Putting money in SGBs provides distinct tax advantages in comparison to other gold investment alternatives.

• The 2.5% annual interest accrued from SGBs is categorized as “Income from Other Sources” and is subject to taxation by the income tax slab.
• Should you liquidate your SGBs on a stock exchange before the five-year lock-in period, the capital gains are subject to a 20% tax rate with the inclusion of indexation benefits. This aligns with the tax treatment applied to long-term capital gains from physical gold and gold ETFs held for over three years.
• The most appealing aspect is the exemption from taxes on both the capital gains and the ultimate redemption value if you retain your SGBs until maturity (eight years). This renders SGBs a remarkably tax-efficient choice for long-term gold investors.

In times of economic downturns, when conventional assets such as stocks and bonds often incur substantial losses, gold frequently maintains its value or even appreciates, serving as a hedge against portfolio volatility. Unlike certain financial instruments, gold is a tangible asset with intrinsic value, offering certain investors a feeling of security and control. Nevertheless, the determination of the amount to invest and the duration of investment in these types of assets depends on your risk tolerance and comprehension of financial objectives.