Gold - Not all that Glittery

If fathers loved investment in FDs, moms love to invest in Gold. My mom and I fight over this all the time. Her argument is that gold prices are always on the rise and hence gold jewelry is the best investment. It will grow in value and at the same time you can use it. It even comes in handy as you can keep it as collateral during exigencies. My argument to her is how would gold be an investment when we do not intend to sell it in future. Of course, it can be loaned or sold if we get into a bad situation but there are other better ways to invest in gold.

When you buy a jewelry, you pay a lot of other charges like making charges and wastage. When you go back to loan it or sell it, they deduct sizable grams in consideration and value just 70% of the gold value. So, you stand to lose lot more than you gain. Of course jewels are emotional purchase and are necessary to us, but it must never be seen as an investment.

There are three other better ways to invest in gold – Gold ETFs, Digital Gold and Sovereign Gold Bond

Gold ETFs (or Exchange Traded Funds) are traded in stock market just like any other stocks. In this case, the primary underlying asset is physical gold. When you buy a Gold ETF, they in turn invest in physical gold thus giving it an exposure to daily price volatility. You need to have a Demat account to make investments in ETFs. The same is followed in Gold Mutual Funds as well.

Digital gold is a virtual way of buying gold without having to hold on to physical gold. What makes it attractive is that you can start with one rupee too. With digital gold, you do not have the risk of safe guarding it and you do not have to worry about the quality or purity as in the case of physical gold. When you buy a digital gold, the seller buys 24k gold on your behalf and stores it in an insured vault. Purity of gold will be certified by government approved agencies. Apart from the two major benefits, they are quite liquid. You can sell them or you can get it delivered at your door step as and when you want to. Like in physical gold you can avail loans, you can use digital gold as collateral for loans.

However, since it is not regulated by RBI or SEBI it is important that you buy them from only trusted platforms after thorough due diligence. In India, MMTC-PAMP India, Augmont Gold Ltd and Digital Gold India offer digital gold trough different platforms.

Sovereign Gold Bond (SGB) are gold bonds issued by RBI. Returns from gold in both physical form or digital form are availed when they appreciate. They as such do not earn any money unlike other forms of investment. Once you buy them, they are kept in locker and you get your returns when you sell it. This is where SGBs get interesting. These allow you to take advantage of the appreciation and also get fixed annual return. Interest rate is fixed at 2.5% per annum paid semi-annually i.e you get the interest paid directly into your account every six months. This is over and above the returns you would get from the gold price appreciation. However, the biggest drawback of SGBs is that they are not liquid in nature. It comes with an 8-year maturity. You have an option to exit after 5 years also. Gold bonds are considerably cheaper as they do not have any storing costs and you get a small discount on buying them online. Also, there is no capital tax gain at maturity as well. These can also be used as collateral against loans.

So next time when your mom says she wants to buy gold for investment, tell her the cons of buying jewelry and pros of buying SGBs or digital gold. I was not able to convince my mom, we’ll see if you can.

Gold over the period of last 40 years have been consistently yielding decent returns. On an average of 40 years, gold has given an average return of 9.6% per annum. Only on 8 occasions, gold has given a negative return in last 40 years. However, gold has given only 5.7% CAGR in last 10 years. It has been an underperformer for the last decade.

Gold has to be seen as a hedge against inflation and the equity (stock) market. Golds are usually inversely proportional to the equity market. When the market is in a bull run, gold prices either stagnate or fall while they rise sharply during the times like recession. Usually, the thumb rule is that we have to invest up to 10% of our entire portfolio in gold. This will help us stay afloat even when market falls badly. It is advisable to invest in either ETFs/ mutual funds or digital gold if SGBs is not your prefered choice.