Anyone looking to purchase gold these days is spoilt for choice. You can buy physical gold in the form of jewelry or gold bars, or you can go the digital route – eGold, Gold ETF, or Sovereign Gold Bonds.
Here, I share my thought process as I navigate through these choices.
How to Choose the Gold Investment Option that is Right for YOU?
Notice the emphasis on YOU? That’s because there is generally no right or wrong answer when it comes to investment. Personal finance has the word ‘personal’ for a reason – you need to decide what works for you based on your reality. What you will read below is how I went about it, and which option(s) I selected. My motive here is to help you approach this decision the right way, not to tell you what option you should go for.
The first, and most important step, for me was to understand if my portfolio needs exposure to gold. There are so many products in the market that if we start adding everything to our portfolio it will become an unmanageable mess.
When it comes to gold, you either purchase it for jewelry or as a hedge against equity. I had a need for both of these use cases, so I evaluated the available options with that lens.
Purchasing physical gold (in the form of a certified gold bar, coin, or jewelry) makes sense if it is for an upcoming special occasion, such as a wedding, or anniversary gift for your spouse. The tangible nature of jewelry adds a personal touch, making it an appealing option for immediate use.
However, if your horizon extends to a more distant future, the decision becomes more complex. Purchasing gold, especially in the form of jewelry, requires careful consideration of the associated costs, outdated design, and logistical aspects, such as secure storage (in the form of a bank safe, for example). Not a strict no, but one need to consider these factors before going for it.
However, purchasing jewelry as an investment is not wise in my opinion. Here is why:
- When you purchase jewelry you pay a making charge and a wastage charge to the jeweler, which can be a significant amount depending on the design of the jewelry, thus inflating the cost. But when you sell, the jeweler only pays for gold. So, you lose some money there.
- Generally, jewelers purchase jewelry at some discount from the current market rate, so you end up losing some more!
- And then you have to pay capital gain tax on the amount you get.
If the tangible allure of gold appeals to you, I believe purchasing certified gold bars is a better option.
Digital Gold or e-Gold
Now, onto the digital scene. Big players like Google Pay and Paytm make it a breeze to snag e-Gold for as low as ₹1/-.
I am not a big fan of this option though. There are no govt run regulating bodies (like SEBI) for e-gold, which could lead to issues in future. And the option to purchase gold for ₹1/- is just a marketing gimmick in my opinion. If you purchase a small amount of gold (say, ₹100) each month, you will accumulate around 2g of gold (at current price) in 10 years. Is it really worth it?
If you are thinking of purchasing e-gold to avoid the hassle of storing physical gold, know that while digital storage is free for now, you cannot hold it digitally for an indefinite period. You will either have to sell it virtually, or go for physical delivery after a period.
While I prefer certified gold bars from MMTC-PAMP or Augmont over e-gold (these are the same companies that offer e-gold through fintech players), if you’re eyeing jewelry down the road, this could still be an option (but only after you have considered all the cons). Since you purchase 24-carat e-gold, while jewelry is made of 22-carat gold or less, you may be able to cover some additional charges, such as delivery cost, storage cost, design charge, etc.
However if you are looking at it from an investment perspective, I would advise against it, for reasons given below:
- You pay GST when you buy as well as when you sell.
- On top of that, you pay capital gain tax
- You lose 2-3% right off the bat due to the buy-sell spread (the difference between the buy price and sell price on any day – buy price is 2-3% higher than the selling price).
ETFs, or Exchange Traded Funds, are commodity-based Mutual Funds – they invest in commodities instead of stocks. A Gold ETF invests in gold. When you invest in Gold ETF you get equivalent units instead of actual gold.
If you are looking to invest in gold, this is one of the ways to go about it. Do note that while the expectation is that ETF will exactly mimic the price of the actual gold, that doesn’t happen in reality. The reason for that is two-fold:
- Expense Ratio: Fund Houses charge an expense ratio (generally less than 1%) to take care of administrative expenses of managing the fund. If the expense ratio of a fund is 1% it means that for every ₹100/- invested by you, the fund house deducts ₹1 yearly. Due to this, the price of gold ETF will not exactly mimic the price of actual gold.
- Tracking Error: This is the divergence in the NAV of the fund and the actual value of physical gold. The fund house keeps a certain amount of cash as per the regulatory requirements, and there are some transaction costs involved. This could lead to some divergence in the cost of ETF and the actual value of gold.
So, before investing in the ETF, you must check the expense ratio and tracking error of all the ETFs and go with the one with the least expense ratio and tracking error. You should also consider the liquidity of the ETF that you are purchasing, so you can sell easily when you want to.
Sovereign Gold Bond
There is another trusted way of investing in gold, which is through Sovereign Gold Bonds. This is a government scheme that lets you purchase 24-carat gold in paper/digital format and also pays a 2.5% interest on your investment – you can read more about it on RBI’s website.
Sovereign Gold Bonds are issued for 8 years – though you have the option to trade them in the market if you want to redeem your investment before that. At the time of maturity, SGB’s redemption price is decided as the average closing price of 24-carat gold of the previous 3 business days from the date of repayment, published by the India Bullion and Jewelers Association Limited.
If you hold these bonds till maturity, i.e. for the 8 years, then there is no capital gain tax on your profit. This is one of the biggest advantages of SGB over Gold ETF – the returns in Gold ETF are taxable.
When you invest in SGB, you also get a 2.5% interest per annum (paid half-yearly) on the investment amount. That’s another added advantage that Sovereign Gold Bond has over ETFs.
The biggest disadvantage of SGB in my opinion is that they are to be compulsorily liquidated after 8 years of tenure. You cannot continue to hold them even if the price of gold is below your purchase price at the time of maturity. You will have to suffer a loss in that case. Gold ETF, on the other hand, can be held for as long as you want.
Another disadvantage is that SGB is not available year-round. RBI and banks notify from time to time when the bond is available for purchase. Generally, it goes on sale for 5 days every month, and on special occasions like Diwali, Akshaya Tritiya, etc.
In my opinion, you should consider investing in SGB only if you are planning to purchase gold jewelry 8 years or more from the date of purchase. Even if the gold price goes down 8 years later, you don’t have to worry about the losses because the price of jewelry would also go down in the same proportion. In fact, since SGB tracks the price of 24-carat gold while jewelry is made of 22-carat gold or less, you might also be able to cover the making charges! In addition, you would have also earned some interest on your investment, plus you don’t have to pay locker charges to the bank for the safekeeping of your gold.
Which Option To Use For Purchasing Gold
So, to conclude, this is what I suggest:
|Purpose||Options to Consider|
|For personal use (jewelry, gift, etc.) in the near future||Physical Gold|
|For personal use (jewelry, gift, etc.) in the distant future||Sovereign Gold Bond (8+ years); e-Gold|
|As a hedge against equity||Gold ETF with a low expense ratio and tracking error|
That’s my take. What do you think? Got a different strategy? Share your thoughts below.