Ten Facts to Know Before Investing in Gold
For ages, gold has been the ultimate indicator of a person’s prosperity and wealth. When it comes to India, in addition to being a symbol of prosperity, gold is also the most preferred investment option for investors. Occasion or no occasion, people in India buy and invest in gold, cutting across age, income, or any other criteria. As an investment option, it is treated as one asset that will help them in their ‘times of need’. Some people even buy gold as a hedging tool against inflation.
Indians and their love for Gold
Most Indians (including the NRIs) are known for their love for gold jewelry. Festivals and wedding seasons, especially, are peak times for buying gold. Prompted by World Gold Council (WGC), the demand for gold in India has shot up drastically.
As per a rough estimate by WGC, Indian households have about 16,000 tons of gold stored with them. At the current market price, this is valued over 27.2 lakh crores. This amount is almost double the foreign exchange reserves held by the RBI.
Gold as an investment option
Some people buy gold as a saving option, while others purchase it purely from an investment point of view. Different people have different reasons for investing in gold. It’s time we sit back and think about whether or not it is prudent to invest in the yellow metal. This caution is necessary for the simple reason that there are several risks attached to buying gold. You may end up buying gold at an inflated price, or there may be issues with the purity of the gold.
Once you decide to invest in gold, here are some tips that will help you ensure you don’t end up investing your hard-earned money in the wrong place.
Things you should know before you invest in gold
1. Put a cap on your investment in gold
Despite the recent hike in the prices of gold, experts say that, over the long term, gold prices tend to stabilize. Hence, it’s advisable to limit your investment in gold between 5-10% of your total portfolio as a rule of thumb. This ensures you can diversify your portfolio as well as meet your short-term financial goals.
2. Choose and buy gold in the correct form
Gold can be purchased in various forms – jewelry, coins, bars, gold biscuits, among others. So, as an investor, you need to be aware of the different forms of gold and their pros and cons.
If you are buying gold jewelry, then it is NOT an investment idea. When you go to a jeweler for making new jewelry or melt gold, there are heavy losses in making charges and wastage. This could vary anything between 10-35% of the value of the gold.
Bank coins are a little better option, but banks charge about 5-10% of the cost of gold as a premium. Also, since banks do not buy back these gold coins, they have lesser liquidity. Bullion bars are a good way of investment, but here, the amount involved is so high that a typical person can only dream of buying a gold bar.
One of the most efficient ways to invest in gold is through Gold Exchange Traded Funds (ETFs). Simply speaking, these are mutual funds that invest only in gold and offer an easy and safe mode to buy gold. The charges are comparatively more minor, and one can access the gold electronically. The only disadvantage is that you never get to “see” your gold in physical form.
3. Ensure the purity of gold
Whether buying gold jewelry or physical gold, it’s always better to be safe than sorry. So, avoid buying gold from small jewelers and unorganized markets. Always insist on the Hallmark and BIS mark to be sure of the purity of gold.
4. As a source of current income
A limitation of investing in gold is that gold does not offer any current income in whatever form you invest. The only exception to this rule is if you opt for the dividend option in the gold ETFs. If gold is held in physical form, it involves cash outflow in locker charges for keeping the gold safely.
5. The Capital Gain
For ages, gold has been known as the perfect hedge to guard against inflation. However, contrary to this popular belief, data suggests that absolute ROI on gold is just 0.8% over inflation, indicating poor performance. In comparison, investments in real estate and shares have shown an ROI of about 11% since the launch of Sensex in 1979.
In the short run, however, gold is a better investment option compared to shares. A good time to invest in gold is when the market is going down and inflation is rising. But in any case, buying jewelry is never considered an investment. Its pure motive is to satisfy one’s love to ‘see’ the gold.
6. Lower Risk
There has hardly been any real depreciation in its cost when it comes to India. So, investing in gold does not involve many risks. Last year, even when the government figures showed negative inflation, the actual prices of food items were going up. The same was the case with gold prices as well.
The only real risk with buying gold is the loss of opportunity cost in terms of not investing that amount in some other option, which may offer you better ROI.
7. Liquidity Benefits
This is where gold scores the highest as compared to other investment options. If you have an immediate requirement of cash and you need to liquidate any of your assets, liquidating gold is the easiest and quickest. One can easily convert gold to cash any time of the day. You may visit any bank, and they would be more than happy to give you a loan against your jewelry. You may see a jeweler or a shop owner who would take your gold and offer you cash in exchange. But here again, there are charges which vary from 10 to 35% of the total cost of gold.
However, one challenge here is the emotional attachment that Indians have with gold jewelry. If a person facing a financial crisis has to choose between selling gold, land, and shares, it is the gold that will be the last item to leave the house in case of financial difficulties. This defeats the entire purpose of using gold for liquidity.
8. Income Tax liability
As per the Income Tax Act, any significant gain on the gold investment is subject to capital gains tax. So, it’s always advisable to ask for an invoice when buying gold. However, in India, almost 90% of the gold jewelry traded is without any invoice. For people looking to invest in gold, this is a serious concern. Only well-established and branded jewelers give an invoice as a rule. Everywhere else, it would be best if you asked for it.
To reduce the tax liability while calculating the capital gain tax on gold, one can use indexation benefits. In addition to that, there are no other tax benefits.
9. The convenience of investing
Here again, gold scores very highly compared to other investments. Though, with the rising price of gold, the cost of even a small investment is going up. However, the emergence of ETFs has solved this problem. If someone is looking for a short-term investment, they can easily invest in ETF and make a decent profit.
10. Invest in Digital Gold
Given the current pandemic situations and even otherwise, it’s better to buy gold in digital forms than purchasing gold in the physical form as a rational investor. To begin with, they do not involve the issue of purity and safe storage. There are no making charges, or the GST levied on making charges. Also, in the current Covid situation, where people are afraid of spreading the virus through physical gold, buying digital gold is a much safer option.
Traditionally, India is known to be a country with a great craving for yellow metal. No wonder India is the largest importer of gold. Indians buy gold as a saving and also as an investment. It is treated to be the perfect hedge against inflation.
Data, however, presents a contrasting picture. As compared to real estate and shares, gold performs poorly when compared basis the ROI. However, gold offers the best liquidity and convenience of investing.
Looking at the overall picture, investing in gold is a good idea; however, experts warn that the investment in gold should not cross more than 10% of the total value of your portfolio.
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Q.1: What are the various forms of buying gold?
Ans: Gold can be bought in the physical form (like jewelry, coin, biscuits, or bar) or the digital format.
Q.2: How can one buy digital gold?
Ans: Buying digital gold is straightforward. When an investor buys digital gold, the trading companies check the purity of gold and store it in a safe vault in his name. Once the investor sells the gold, it is removed from the vault.
Q.3: What is the minimum investment that one can make in digital gold?
Ans: A person can buy digital gold of any amount, as low as INR 100.
Q.4: Other than buying physical gold, what are the ways to invest in gold?
Ans: Other than buying physical gold, one can invest in digital gold, Gold Exchange Traded Funds (ETF), or Sovereign gold bonds, which the government issues.