How to Invest in Gold: Best Gold Investment Options in India (2024)

Gold has been a symbol of wealth since ancient times and even in the Information Age has managed to maintain its relevance as an investment. In its physical form, currently, around 190,000 tonnes of Gold are available globally out of which 50% is in the form of jewelry. An additional 17% and 13% of global gold reserves are held by Central Banks around the world and used for various industrial purposes respectively.

At present, the second most popular use of Gold worldwide that accounts for 20% of the world’s physical Gold are investments. These are held by individuals in the form of investments such as Coins, Bars, or as underlying assets of Gold Exchange Traded Funds, Gold Mutual Funds, or Digital Gold.

In this blog, we will discuss the key Gold investment options currently available in India and compare them based on key criteria such as availability, risk, return, cost, liquidity, etc. But first, let’s discuss why investing in gold is relevant in today’s world.

Why Should You Invest in Gold?

The primary reason for investing in Gold is portfolio diversification and in that context, it is considered to be an ideal hedge against the potential volatility of equity investments as well as inflation. Moreover, as shown in the chart below, investments made in Gold have in most cases provided good returns over the past 40 years:

In the above chart, you can see that Gold has on average provided annual returns of 9.6% over the past 40 years, and during that period, only 8 instances of negative annual returns were recorded.

Apart from the returns offered by Gold, another key reason for using it as a hedge is based on the fact that it has historically shown lower volatility than equity investments over the long term. In fact, in many cases, it has shown an inverse correlation to equities, i.e., returns of Gold have historically been high when equity markets have witnessed a downturn.

In the above graph, you can see a few key instances when Gold showed superb performance such as 1991-1993, 1999-2001, 2007-2010, and 2020. In each of these instances, Equity markets had corrected significantly due to various reasons such as the Indian Currency Crisis (1991-1993), Dot Com Bubble (1999-2001), Global Financial Crisis (2007-2010), and COVID-19 Pandemic (2020). Now that we have establishedwhy you should invest in Goldeven in today’s world, let’s discuss the different ways how you can invest in Gold.

How to Invest in Gold: Gold Investment Plans in India

To invest in Gold you either opt for the physical form or the digital form. In its physical form, Gold as an investment can be held in the form of jewelry, coins, bars i.e. bullion, etc. There are, however, a few key limitations of investing in physical gold:

• Making/designing charges make purchases expensive
• Storage expenses are applicable due to security and insurance requirements
• Selling is inconvenient due to possible impurities and the requirement of origination and purity certificates

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To overcome the limitations of physical gold, you can opt for the digital route which includes investments such as Digital Gold, Gold ETFs,Gold Mutual Funds, and Sovereign Gold Bonds. The following is a short description of each of these investment options:

1. Digital Gold:These can be purchased through various apps in denominations starting from 1 gram onwards.
2. Gold ETFs:Gold Exchange Traded Funds are traded on stock exchanges just like shares and primarily feature Physical Gold and stocks of Gold mining/refining as the primary underlying assets. A Demat (Dematerialised) Account is mandatory for investing in Gold ETFs.
3. Gold Mutual Funds:These are mutual funds managed by various asset management companies (AMCs) that follow a fund-of-fund structure and primarily invest in Gold ETFs. You can invest in most Gold Mutual Funds through the ETMONEY App.
4. Sovereign Gold Bonds:These bonds are periodically released by the Reserve Bank of India (RBI) and available for purchase through leading public and private sector banks. While returns are pegged to the price of gold and guaranteed by GOI, they actually do not have physical gold as an underlying asset.

Do keep in mind that while the performance of all the above examples of Gold as an investment is linked to the price of Gold, there are significant differences between them in terms of risk, returns, availability, liquidity, lock-in period, and taxation. Let’s discuss these aspects of Gold investment options in detail starting with risk.

Key Risks of Investing in Gold

Like any type of investment, Gold as an investment is also prone to various risks which vary from one investment option to another. The following are the key risks associated with each of these investments:

• Digital Gold lacks regulatory oversight because it does not have a regulatory body such as SEBI or RBI as of yet. Moreover, there are currently only 3 players who dominate this market in India – Augmont Gold, MMTC-PAMP India, and SafeGold, which also increases the overall risk of the investment.

• Gold ETFs and Gold Mutual Fund share the same risk – market risk due to the potential volatility of gold prices. This is because, in the case of both instruments, the underlying asset is primarily Physical Gold. For example, Gold ETFs invest either in Physical Gold or in the stocks of companies engaged in mining/refining gold. Thus an increase or decrease in the price of Gold impacts the performance of Gold ETFs. Gold Mutual Funds follow a Fund of Fund structure and primarily invest in Gold ETFs thus Physical Gold and stocks of Gold mining/refining companies become the underlying asset for these schemes. At present, both these financial products are regulated according to the guidelines of SEBI.

• The sovereign default risk applicable to Sovereign Gold Bonds is due to the fact that this instrument is not backed by physical gold and is instead a derivative of Gold issued by the Government of India through the Reserve Bank of India (RBI). In this case, the Government uses the price of gold as a benchmark and issues the bonds that guarantee periodic interest payments (at 2.5% p.a.) along with investment value at maturity. A sovereign default in this case refers to a situation where the Government of India is no longer able to make scheduled repayments on its outstanding debt. This situation can typically occur when a country’s debt levels are very high and there is a simultaneous economic downturn in the country. But at the moment, there is very little chance of this happening in India.

Next, let’s compare these investment options based on minimum investment amount to determine their affordability for investors.

Minimum Investment Requirements

The minimum investment requirement differs from one Gold investment option to another and plays a key role in ensuring affordability, especially for new investors. The following table sums up the minimum investment requirements for different instruments:

From the above table, you can see that the entry point when making investments is lowest in the case of Digital Gold and Gold Mutual Funds while Sovereign Gold Bonds, Gold ETFs, and Physical Gold require significantly higher minimum investment amounts.

Comparison of Returns and Costs of Gold Investment Options

In case you are opting for gold as an investment, returns generated from the investment are inversely correlated to the cost of making the investment i.e. lower costs lead to higher returns and vice versa.

The reason for this is because the underlying asset is the same i.e. the price of gold – an increase in price would lead to an appreciation of your investment, while a decrease in price can potentially lead to a loss. The following are the costs associated with each investment:

In the cost section for Digital Gold, you will see the term “Spread”.This “Spread” is the difference in the buying and selling price for the investor. In practice, the price of buying Digital Gold is approximately 6% higher than the selling price offered by platforms that sell Digital Gold. This spread is implemented in order to recover costs associated with physical gold such as secure vault storage cost, technology costs, hedging costs, insurance, transportation cost, etc.

Sovereign Gold Bonds do not have any visible expenses primarily because they are a derivative product guaranteed by the Government of India and not backed by physical gold. In fact, there is currently a Rs. 50 per gram discount for online purchase of these sovereign bonds. Moreover, this investment guarantees fixed interest of 2.5% annually which is credited directly to the investor’s bank account. In view of these factors, Sovereign Gold Bonds does seem to be the most profitable way to invest in Gold. That said, just as in the case of other investments, you do need to consider the aspects of availability which we will discuss next.

Availability of Gold Investment Options

Availability refers to the ease with which an investor can purchase an investment and also if there are any restrictions that might affect an investor’s ability to invest in the product.

In most cases, Digital Gold, Gold ETF, and Gold Mutual Funds are readily available for purchase through the appropriate channels. In this regard, Sovereign Gold Bonds are a bit different – these bonds are released every 1 to 2 months by the RBI and typically this buying window is open for 5 days. Apart from availability, which determines how easily you can invest, you also need to consider how easy it would be to liquidate i.e. monetize your investment, so we will discuss this next.

Liquidity of Gold Investment Options

With respect to investments, liquidity typically refers to the ease with which they can be bought and sold.

• Physical gold, digital gold, gold ETF, and gold mutual funds can be bought and sold quite easily. Hence, they can be considered as liquid investments.
• Sovereign gold bonds currently have a maturity period of 8 years. However, that does not necessarily mean that the investment needs to be compulsorily held till maturity. In case you want to redeem before maturity, you have 2 options.
  • You can prematurely encash the bonds after 5 years, i.e., after completion of the lock-in period. In case you want to redeem your investment before the completion of this 5-year period, you have the option of listing and selling your sovereign gold bond in the secondary market. This can be done at any time after the completion of 6 months from the date of issue. However, the secondary market has low volumes, so you might have to sell your bonds at a discount as compared to the market price of gold.
  • In case you are looking for an option to monetise your investment that does not involve selling or premature encashment, you can opt for a loan against your bonds. For example, SBI offers a loan against sovereign gold bonds for amounts of up to 35% of the value of the bonds used as collateral.

The final factor that we need to consider in our evaluation is the taxation of gold investment options, so let’s talk about that.

Taxation of Gold Investment Options

Primarily, gold investments are taxed at the time of selling or at the time of maturity. Capital-gains taxation rules are applicable in the case of physical gold, digital gold, gold ETFs, and gold mutual funds. Depending on the holding period of your investment, i.e.,the time period between the purchase and sale of your investments, either short-term capital gains (STCG) or long-term capital gains (LTCG) rules may be applicable. If the holding period of these investments prior to redemption/sale is up to 3 years or shorter, the gains are classified as STCG. If the holding period is greater than 3 years, LTCG applies.
The following table summarises how different investment vehicles are taxed.

From the table, we can see that if you invest in digital gold or physical gold, then your holding period decides if STCG or LTCG will apply. If your holding period is less than 3 years, then STCG will apply, and the gains will be taxed as per your income tax slab. However, If the holding period is more than 3 years, then LTCG will apply, and your gains will be taxed at 20% post the indexation benefit.

If you invest in gold funds or gold ETFs, then irrespective of your holding period, gains are taxed as per your tax slab. In the Finance Act 2023, the indexation benefit which was earlier available to gold funds/ETFs was removed due to which gold funds/ETFs now are taxed as per tax slabs irrespective of the holding period.

The taxation of sovereign gold bonds is a bit different. There are 4 possible ways that your investment may be taxed and they are as follows:

• Taxation on interest: The interest earned from sovereign gold bonds (currently 2.5% p.a.) is entirely taxable. It is added to your income for the applicable FY and taxed according to the applicable slab rate.
• Taxation on premature redemption: In case you prematurely encash your investment after the completion of 5 years, the gains are entirely tax-free. The RBI typically offers redemption windows every 6 months after completion of the 5-year lock-in that can be utilised for premature encashment.
• Taxation on maturity: In case you hold your sovereign gold bonds till maturity and encash them after the completion of the 8-year holding period, your gains from the investment will be tax-free.
• Taxation on secondary-market sale: In case you redeem your bonds through the secondary market, you will be taxed according to the capital-gains taxation rules. If you sell the bond before three years, the gains will be added to your income and taxed as per the slab. If you sell it after three years, the tax rate is 20% post indexation. Thus, either STCG or LTCG tax rate will apply to your investment depending on the holding period of the bonds.

From the above discussion, you can see that each of these gold investment options comes with its own unique set of features and benefits. In the following section, we will discuss our key takeaways as well as some key tips to help you decide which one is most suitable for you.

Bottom Line

After comparing the risk, minimum investment requirements, returns, costs, liquidity, availability, and taxation rules of different gold investment instruments in India, the following are our key takeaways:

1. Sovereign gold bonds are the most suitable choice if you plan to stay invested for an extended period (5+ years). Not only will you receive regular interest payouts while you stay invested but you will also have the option of making tax-free redemptions after staying invested for at least 5 years. Lastly, the redemption of these bonds at maturity i.e. after completion of 8 years, is also tax-free.
2. For short-term investment physical gold and digital gold might look attractive options. However, they are not recommended as they are not regulated by any government authority and they have significantly high buy-sell spreads. This means when you buy you will need to pay more than the prevailing gold price and when you sell, you will get less. So, if you wish to take a tactical bet in gold and capture an 8-10% rise in gold like the one we saw in the month of April 2023, then they are not an ideal choice as the costs (GST + spread) will reduce your returns.
3. In case you are looking to stay invested in gold for the short term, i.e., no more than 3 years, you can opt for gold mutual funds or gold ETFs, which have high liquidity and availability. Even after the recent change in the taxation of gold funds and ETFs, they are a better option because if you wish to invest for the short term (less than 3 years) or take a tactical bet in gold, then the taxation rule is the same as the other options (digital/physical gold). Moreover, the other options are also not recommended due to the high costs (GST + spread) associated with them.