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investing in gold in india cover

Is Investing in Gold a good idea in India?

A large proportion of the Indian population considers Gold as one of the best options to invest in India. Here, gold is not only treated as a satisfactory long term wealth creator but also auspicious and a symbol of social status. As per the World Gold Council, India ranks second in the globe in Gold consumption, after China. Up to 20-25% of the world’s Gold is consumed in India in the form of jewellery, bars, coins etc.

Ironically, a few years back, the fixed deposit was considered more promising investment options for the middle-class Indians. However, nowadays, the interest earned on FDs has gone substantially down, because of which FDs don’t seem to be as genuine potential wealth generating option like earlier. These days, people are again revealing a lot more inclination towards Gold investment.

Anyways, Gold is a long term investment option and not suitable for earning short term gains. Moreover, the prices of Gold fluctuate in a cyclical manner. Therefore, one cannot expect Gold to perform well all the time.

Why should you invest in Gold?

Indians have been investing in gold for thousands of years and it has so far proved to be a solid investment option. Here are a few best reasons why you should invest in gold:

— Gold acts as a hedge against inflation: History states that Gold has performed relatively better compared to equities or other investment options in the scenarios of high inflation. Stock prices do not have any functional relationship with inflation. However, as Gold belongs to the commodity market when the economy witnesses rising inflation, the Gold price goes up.

bloomberg report gold inflation

(Image credits: Goldsilver.com)

— Investing in gold won’t cost you a fortune: Unlike investing in real estate (which requires a bigger investment amount) or equities (which require paperwork to open your trading account), investing in gold is easier for most of the average Indians and does not require a big amount to get started.

— Investment in gold offers high liquidity: If you own a Gold coin or jewellery, you can easily liquidate it as you can sell your physical gold at a local jewellery shop anytime. Although stocks and mutual funds can also be converted into cash fast. However, such instruments do take a few days time to process the redemption and the selling amount to get credited in your bank. As compared to these securities, Gold offer higher liquidity.

— Gold investment can help you to balance the risk in your portfolio: In order to reduce the portfolio risk, it is important to diversify your investments. Gold, having a negative correlation with Equities, can help you in diversifying your portfolio in a convenient way. Whenever your equity portfolio is going through a bear phase, a notional loss on the same can be absorbed by your gold investments.

Also read: How Does The Stock Market Affect The Economy?

How to invest in gold?

First of all, Gold investments do not only mean investing in physical Gold like gold coin or jewellery. There are various other ways available for investing in Gold in India.

Although investing in Gold via jewellery is decent in terms of generating long term wealth. However, keep in mind that when you purchase Gold jewellery, you have to pay the making charges too. Despite, when you sell that jewellery, you will only get the price for the Gold (and not the making charges that you paid earlier). Instead of investing in Gold jewellery, opting for Gold coins or bars seems a better choice. The latter is more profitable because here you do not need to pay the making charges.

Anyways, you can also invest in gold via Gold Mutual Funds. These funds invest in those companies which carry out extraction and mining of Gold or marketing of the same. The Gold Fund schemes are managed by skilled and experienced Fund Managers and are highly liquid. Therefore, investing in these Funds is a convenient option if you are looking to invest in gold. Nonetheless, the cons associated with the gold fund is that you might have to pay an exit load on your investments. Apart from that, you also have to pay an expense ratio which is deducted from your NAV every year for management and operational expenses.

Further, Gold ETF is another option while investing in gold. It works in a similar manner like Gold Mutual Funds but the same is traded on a stock exchange. However, you need to have your own Trading and Demat Account with a broker to invest in a Gold ETF. In addition, Gold ETF does not allow you to invest via SIP mode, unlike Gold Mutual Funds.

Lastly, if you want to invest in gold via the direct stock market, you can opt for investing in Gold mining companies. Investing in Gold mining stocks means investing in companies engaged in the mining and marketing of Gold. The performance of these stocks is not only related to the fundamental factors of the companies but is also dependent on the Gold rates.

Cons of investing in Gold

No investment option is perfect and gold investing also have some limitations. Here are a few key pointers which you should keep in mind while you invest in Gold:

— Gold does not generate sufficient returns like stocks or bonds: Gold is not a passive investment option. Investing in gold does not offer dividends or interests. Therefore, the only way to make a profit from Gold investment is by selling off.

–  Your Gold investment may demand safety against theft or robbery: Gold is a valuable asset. If you are planning to keep physical Gold, storing the same might be a matter of concern. Alternatively, you may store your physical gold in a bank ‘locker’ but this may cost you periodical maintenance charges.

gold safety thief

— Investing in Gold is not tax-free: When you purchase physical Gold, you will be charged GST on the same. Moreover, Gold is treated as a capital asset. Therefore, whenever you sell Gold for profit, a tax on short term capital gain or long term capital gain is applicable. You can read this blog to know more about taxation of Gold in India.

— Gold investing is cyclical: As we discussed earlier, the prices of Equities and Gold usually move in the opposite direction. When the stock market witnesses a bearish (downward) trend, the Gold price goes up and investors find Gold an attractive investment option during these times. However, when the cycle changes and the stock market goes in a bull run, the gold price starts going downwards and gold investing may be ignored by the investors.

Conclusion

In this post, we covered the basics of investing in Gold. If you are seeking a regular source of income through your investments, Gold may never serve this purpose. However, if you want to hedge your existing investments in Equities and Bonds, you should consider investing in Gold. Further, if you are planning to invest in Gold for the very first time, it is recommended to start investing via Gold Mutual Funds or Gold ETF.

Apart from acting as a hedge against inflation, Gold comes in handy during the situation of financial crisis. Nevertheless, you should not treat Gold as your only choice, but consider it as one of the investment options in your portfolio. Ideally, you should allocate up to a maximum of 10% of your portfolio in Gold.

Whether you invest in Gold or not is solely your choice. However, what matters more is the clarity in your mind regarding why you are investing in the same.

getting-smart with investment in gold

Getting Smart With Investment in Gold.

Gold Investment Quotes by Famous Investors:

“If ever there was an area in which to do the exact opposite of that which government and the media urge you to do, that area is the purchasing of gold.”— Robert Ringer

“People view gold as emotional, but when they demythologize it, when they look at it for what it is and the opportunity it represents, they are going to say ‘We really should own some of that’. The question will then change to ‘Where do we get the gold’?” – Thomas Kaplan (Over $2 Billion Invested in Gold)

Do you know that India Ranks 1 in the highest gold jewellery consumption in the world? India and China account for 44% gold jewelry consumption globally.

This alone proves that the Indian men and women are highly interested in buying gold jewelry. Further, gold is also treated as a sign of royalty in India. However, when it comes to investing in gold, now a day, people do not consider it as a good option. With the increase in the paper assets, the gold investment is slightly fading away.

Moreover, most of the investors think that investment in gold is not as rewarding compared to stocks, bonds, and real estates.

Here is what Warren Buffet used to say about gold:

“(Gold) gets dug out of the ground in Africa, or someplace. Then we melt it down, dig another hole, bury it again and pay people to stand around guarding it. It has no utility. Anyone watching from Mars would be scratching their head.”

“I have no views as to where it will be, but the one thing I can tell you is it won’t do anything between now and then except look at you. Whereas, you know, Coca-Cola (KO) will be making money, and I think Wells Fargo (WFC) will be making a lot of money, and there will be a lot — and it’s a lot — it’s a lot better to have a goose that keeps laying eggs than a goose that just sits there and eats insurance and storage and a few things like that.

“You could take all the gold that’s ever been mined, and it would fill a cube 67 feet in each direction. For what it’s worth at current gold prices, you could buy — not some — all of the farmland in the United States. Plus, you could buy 10 Exxon Mobils (XOM), plus have $1 trillion of walking-around money. Or you could have a big cube of metal. Which would you take? Which is going to produce more value?”

Also Read: Why Buffett thinks investing in gold is stupid

However, being born in a middle-class family, and listening to my mother continuously talking about the jewellery & rising prices of gold, I differ a little with Warren Buffet’s idea of investing in gold.

Gold has been used as a currency for over centuries in this world. Gold is assumed to be first found in Egypt in 3000 BC. However, gold started acting as a currency only since 560 BC. Nevertheless, gold is one of such rare items which has consistently been in the market and used to buy/exchange items.

I believe that everyone should have a small portion of his portfolio invested in gold. There are various reasons why I believe this, however there are few main points:

Why should you Invest in Gold?

1. Gold has high liquidity:

No matter which part of the country you live in, gold can easily be converted in cash and readily be bought and sold. However, such option is not available with other paper assets like stocks and bonds or physical assets like real estates. Further, there is no or minimal paperwork required in gold investment.

2. Gold preserves wealth:

Here is a chart showing the upwards trend of gold over the last few centuries.

gold investment trade brains

Source: http://goldprice.org/gold-price-india.html

From the year 2006 to 2011, gold has given a return of 29% per annum. Further, if we consider long term, it has given a return of 10% per annum. Overall, gold will preserve your wealth if you hold it for a long-term duration.

3. Hedge against inflation:
Gold acts a great investment to protect your money from inflation. Over the past couple of years, as the purchasing power of Rupee is declining; on the contrary, the price of gold is consistently increasing.

4. Portfolio Diversification:
Gold acts as a great asset for diversification. As gold has a negative correlation with other asset types like stocks bonds etc, gold moves in the opposite direction than these assets. Let me explain this with an example:

Here is a chart of SENSEX over the past few years.

In the above chart, please notice that when the SENSEX was sharply falling in 2008-09, the prices of the gold kept skyrocketing during this duration. Hence, if you had diversified your portfolio with gold investment, you wouldn’t have faced so much loss compared to concentrated investment in stocks.

In short, gold investment can help investors to avoid financial disasters.

Also read: 6 Reasons Why Most People Lose Money in Stock Market

Apart from the above four reasons, there are few other reasons also which favors gold investment.

For example, in the 21st century, every country has a different currency. Nevertheless, gold can act a commonly acceptable asset anywhere in the world. Further, it’s much beneficial to keep a gold in your pocket than a currency which is not acceptable.

In addition, gold is also a great investment to pass on to your next generation who might not have such luxuries to find gold in abundance.

How to invest in Gold in India?

Now that you have understood the importance of gold investment, I would like to highlight the simple ways by which you can invest in gold in India.

Typically, there are two ways to invest in gold:

1. Physical Gold Investment:

  • Jewellery Buying:

gold investment in jewellery

This is the old and conventional way of gold investment. You might have seen the jewellery of your mother, sister or other members of the family, which is the best example of gold investment through jewelry. Although these pieces of jewellery act more like ornaments, still they are worth considering as an investment.

The pros of buying gold jewelry are its easy feasibility along with zero paperwork.

However, there are also few cons while investing in gold jewelry.  For example, first of all, you need to pay the making charges (10-20% of total cost) along with the price of the original gold. Second, when you will sell the jewelry, the buyer will not consider the making charge. In addition, he will also demand a purchase discount (5-10%). Lastly, there is a high risk of theft and burglary in storing gold jewelry.

  • Gold Coins and Bars:

gold investment in bars and coins

These are a better option for gold investment compared to buying jewelry. There are no making charges involved here. You can buy or sell the gold coins and bars from any Jewellery shops. Further, some banks also sell them.

One of the biggest benefits of investing in physical gold assets is that you won’t need to open an account to start investing. No demat or trading account is required for this type of gold investment, unlike paper assets like stocks or bonds.

2. Paper Gold Investment Options:

  • Gold ETF:

gold investment by gold etf

ETF stands for Exchange traded funds. Gold ETF is a type of mutual fund which invests in gold and units of this mutual funds scheme is listed on the stock exchange.

You can invest in Gold ETF through a demat account. However, this type of investment of gold involves assets management and brokerage charges. Brokerage fee for gold ETF is around 0.25-0.5% and the fund management charges are approximately 0.5-1%.

Because of these charges, the returns on Gold ETF are less than the actual increased value of gold. Gold ETF is directly proportional to the price movement of gold and is not affected by market fluctuations.

  • Equity-based Gold funds:

This type of gold investment involves investing in companies related to mining, extracting and marketing of gold. Market fluctuations affect equity-based gold funds. Further, equity-based gold funds are susceptible to different risks like gold price risk and equity-based risks.

The biggest benefit of paper gold investment options is that there is no risk of theft or burglary here; as compared to physical gold.

How much to invest in Gold?

The portfolio allocation for gold investment varies for different investors according to their investment strategies. In general, small investors should keep 5-10% of their portfolio invested in gold. Gold doesn’t give an as high return as stocks or real estate. Nevertheless, gold investment will help to mitigate the risks in your portfolio.

How to start investing in Gold online?

You can buy gold ETF or gold fund online just like a mutual fund. However, you need to research carefully about the different ETF’s available. Here is the list of few gold ETF schemes available in India:

  1. Birla Sun Life Gold ETF
  2. Goldman Sachs Gold ETF
  3. SBI Gold ETF
  4. IDBI Gold ETF
  5. R*Shares Gold ETF
  6. Axis Gold ETF
  7. Kotak Gold ETF
  8. ICICI Prudential Gold ETF

Also read: Top 10 Gold ETFs in India

That’s all. I hope this post on ‘Getting smart with Investment in Gold’ is useful to the readers. Further, please comment below your opinion about investment in gold.

Is Gold Investment good for a small investor?