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Gold Investment

Ways To Invest In Gold: What Would You Choose?

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A popular and effective approach to diversify your portfolio and safeguard your funds from market instability is to invest in gold. Even if you have a lot of possibilities, it’s crucial to comprehend the many gold investing options and how they might work for you. The three best ways to invest in gold—physical, digital, and sovereign gold bonds—are compared and contrasted in this article.Consequently, you may decide on your gold investments with awareness. 

The most common types of gold investments are: Physical gold – owning physical bars or coins, Gold ETFs (Exchange Traded Funds), Gold futures and Gold mining stocks.Most financial advisers advise investing up to 10%-20% of one’s investment portfolio in the yellow metal for the purpose of asset diversification and also as the yellow metal acts as a perfect hedge against inflation and currency risk. However, purchasing actual gold in the form of jewelry or gold coins has its own set of drawbacks, such as expensive manufacturing and storage costs. Before you choose which type of gold investment is right for you, it’s important to understand the basic pros and cons of each. The best way to invest in gold will depend on your individual situation. Some gold investments are better suited for certain investors. 

For example, if you’re looking to make a short-term investment, then a gold future may be right for you. If you’re looking for an investment that will be liquid in case of an economic crisis, then physical gold may be the best option.

Physical Gold Investments

Physical gold investments are one of the most liquid gold investments. While on the other side Physical gold investments typically have the highest upfront cost and lowest return. Due to concerns about inflation and coronavirus variant in 2022, gold was anticipated to perform well in the medium run. Though actual gold was formerly seen to be a wise investment, this is no longer the case for a number of reasons. The returns on keeping actual gold have been low in 2021 and the risk is significant.

If an investment is to be made, gold is the most preferred tangible option. It can be purchased as jewellery, gold coins, gold biscuits, and gold bars. Contrary to the acquisition of digital gold, the purchase of physical gold is typically kept very secret.

Any jeweller will sell the yellow metal directly to you. As a result, there is no counterparty risk and no involvement of a broker or middleman. Physical gold can be purchased indefinitely. However, because gold bars must be purchased in increments of at least 10 grams, actual gold requires a slightly larger minimum investment. One is usually advised to keep tangible records of all their gold acquisitions. They will benefit from it while filing their taxes.

Digital Gold Investments

Gold-related assets that are stored online, such as on a digital exchange, are referred to as digital gold investments. Purchasing digital gold simply entails parting with money, but you do not receive actual gold in return; instead, you receive a certificate, paper, or online account statement detailing the quantity of gold you have purchased. These investments are exchanged in the same way that any other financial instrument is. 

Investments in digital gold are made in 24-carat, 999.9 per cent pure gold held in the vaults of the custodian. Furthermore, actual gold purchases are subject to high fabrication costs. Digital gold does not attract any cost apart from a one-time levy of 3% GST. Gold ETFs incur recurring annual charges of around 0.5-1%. You don’t need to hold a Demat account to buy digital gold, like in the case of gold ETFs and SGB. Also, digital gold pricing in India is consistent, you can trade gold online at fully transparent, real-time market values. However, trading in digital gold is driven by supply and demand.

The trading hours for Gold ETF and SGB are only from 9 am to 3:30 pm because they are exchange-traded, however, Digital Gold is available for purchase and sale around-the-clock. Therefore, the key differentiation is liquidity. With digital gold, you can purchase actual gold that is kept in a vault in physical form for purchase. In contrast to SGBs, digital gold has total value investment insurance.

Sovereign Gold Bonds (SGBs)

SGBs are gold-backed bonds issued by the RBI on behalf of the government. You are essentially lending money to the government in exchange for interest. The bonds’ interest rate is set at 2.50 per cent per year. The capital gains earned when SGBs mature are completely tax-free. 

SG bonds are sold on stock exchanges and have an 8-year maturity with a 5-year window for early redemption. Earlier-issued gold bonds can also be purchased through stock exchanges. The minimum and maximum investments in SGB per financial year are 1 gramme and 4 kilogrammes of gold, respectively. However, as occasionally announced by the government, the maximum restriction for trusts and corporations is 20 kgs. SGBs may be held singly or collectively. Additionally, the first applicant in a joint application is subject to the limit.

However, investors must pay taxes if they opt to cash out before the 5-year maturity period. Long-term capital gains will be taxed at a 20% rate, with an indexation benefit for early withdrawal. Due to their high risk, sovereign gold bonds generally have a lower interest rate than government paper bonds.

Comparing and Contrasting ways to invest in gold:

Parameters 

Physical Gold

Digital Gold

Sovereign Gold

Meaning 

Physical gold can be found in jewelry, coins, bars, and biscuits.The purity of actual gold may or may not be 99.5%.

As the name implies, digital gold is a virtual way to buy and invest in gold. 

Government securities with a gold value are known as sovereign gold bonds (SGB).

Price

Prices for physical gold vary.

Price is dependent on market fluctuation 

The issue rate is set by the government.

Lock-in-period

No lock-in period

No lock-in period

Five year lock-in period

Investment Affordability

Gold biscuits or coins are available in the standard denominations of 10 grams. Hence, it requires a huge investment to invest in physical gold.

More affordable since minimum investment is Re.1

Not affordable by all but some can since minimum investment is 1 gram, which is approximately Rs. 4,741.

Taxation

The capital gains from a gold investment held for less than three years are taxable as per the investor’s income tax slab rates. For an investment withholding period of more than three years, the gains are taxable at 20% with indexation benefit.

Digital gold is treated the same as physical gold. Returns on these assets held for under 36 months are not taxable. Beyond 36 months, long-term capital gains tax at 20% on the whole amount is applied.

Any capital gains on SGBs at maturity are completely tax exempt. However, the capital gains for premature redemption are taxable similar to physical gold.

Regulation 

Physical gold is regulated by government of India

Not backed by any regulatory authority.

Sovereign guaranteed, issued by RBI.

Risk

Higher risk of loss due to theft and other reasons

Higher risk of loss

Lower risk of loss

Returns

Aligned with current market prices  

Aligned with current market prices  

Aligned with current market prices + 2.5% annual interest – paid semi-annually.

Conclusion

A number of authorized online sites provide digital gold, which is an excellent substitute for large-scale investments in gold coins and bars. Similar to bank fixed deposits, sovereign gold bonds give investors the opportunity to profit from changes in the gold price while still earning income. Both of these serve as excellent replacements for physical gold purchases. However, physical gold is accepted anywhere and can be exchanged for cash at any time. An investor’s preference and investment goal therefore have the most influence over their choice of investments. Therefore, before choosing one of these options, investors must have a fundamental understanding of each.

Moreover, compared to other assets, gold is significantly more stable during market volatility. It acts as a hedge against inflation and other economic risks, stabilizing the investor’s portfolio’s value in the process.

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