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The Best Way to Invest in Gold 🥇

Equity markets are volatile by nature. Uncertainty only adds to that fluctuation. Look at the recent events for example, the world was in turmoil because we couldn't predict what the Russia-Ukraine conflict would lead to.


Risk aversion was the key theme seen across markets. Investors tend to flock to ‘safe assets’. Gold has historically achieved to become a store of value, as a precious metal. While the equity markets dived deep, gold prices soared up. This phenomenon has been repeated time and again. Take for example the 2008 Global Financial Crisis. On 15th September 2008, the Lehman Brothers collapsed and the gold prices skyrocketed.


Safety, liquidity, and returns are the three criteria most risk-averse investors look for before investing. While gold meets the first two criteria without any hiccups, it doesn’t perform poorly at the last one either.


Investing in gold is worthwhile because it is an inflation-beating investment. Over time, the return on gold investment has been in line with the rate of inflation. Adding gold to your investment portfolio acts as a good diversification tool, curbing the overall volatility of your portfolio.


How can you then add gold to your portfolio?

A few ways:

  1. Physical gold - the old school way, but with problems of storage, safety, and purity (unless you’re buying from trusted standardised sources)

  2. ETFs - exchange-traded, funds do the buying and depositing gold for you. They may buy it in physical form or dematerialised. Returns on these are very close to the returns on gold, and additionally they give you the flexibility of being able to trade like stocks do.

  3. Mutual Funds - funds that buy bullion, invest in stocks and bonds of gold manufacturers and miners. Returns are closely linked to gold prices. They can be bought and sold like any other mutual fund.

  4. Sovereign Gold Bonds - issued by the RBI, they are bonds that pay interest, and also give benefits of an increase in price directly linked to gold prices. Interest is at 2.5% per annum. These are 8 year bonds, redeemable after 5 years. Gains are exempt from tax if you invest for 8 years and beyond. These can either be subscribed to when the government issues them, or they can be bought from the secondary markets.

  5. Digital Gold - an instrument that allows you to invest in pure gold in digital form. Whenever you buy digital gold, the issuing party stores an equivalent quantity of physical gold in secured vaults. You can sell this gold at any time at live market rates, in either rupees or grams. In India, digital gold is primarily sold by three entities - MMTC-PAMP, Augmont Goldtech and Digital Gold India (SafeGold). These firms have tied up with service providers like PayTM, Google Pay, Amazon Pay and PhonePe, among others, to sell digital gold via their platforms.

Which option is the best?

There are several advantages and disadvantages to each of these instruments, despite all of them being very closely linked to the same underlying asset - gold!


✅ From a returns perspective, SGBs are the best since you get the price benefits of gold and an additional 2.5% per annum.


❌ However, from a cost perspective, Digital Gold is the worst because of high transaction charges and GST. You can lose as much as 7% by investing in this.

Instrument

Returns

Cost

Physical Gold

Linked to Gold prices

0 (unless stored in lockers) and 3% GST

Gold ETFs

Linked to Gold prices

Expense ratio of <0.5%

Gold Mutual Funds

Linked to Gold prices

Management expenses of <0.5% and Exit load of ~1% on redemption before 1 year

Sovereign Gold Bonds

Linked to Gold prices + 2.5% annually

1% commission on distribution

Digital Gold

Linked to Gold prices

~4% on buying + selling together and 3% GST

However, that’s not the only consideration you should have. There are other advantages and disadvantages to each of the instruments as well.

Instrument

Advantages

Disadvantages

Physical Gold

Can use for other things like jewellery

Storage, safety and security can be an issue

Selling requires physically taking it out and selling

Gold ETFs

Easily tradable, can buy and sell at any time and immediately

Low expense ratio

Tracks price of gold very closely

There can be small deviations in the price of the ETF and the underlying NAV

Gold Mutual Funds

Low expense ratio

Tracks price of gold very closely

Can take 1-2 days to buy or redeem

Exit load if redeemed before 1 year

Sovereign Gold Bonds

Government-backed

Additional return of 2.5% per annum

Gains are tax exempt

Redeemable after 5 years

Digital Gold

Minimum ticket size is very low, as good as pocket change

Costs are very high

What’s the verdict then?

In our opinion, there are 2 instruments which stand out:

  1. Gold ETFs

  2. Sovereign Gold Bonds

The only point to contest is here is of the need of liquidity. In case, you want the flexibility of buying and more importantly selling at any point in time, Gold ETFs are the way to go. However, if you are comfortable with the money staying locked in, SGBs are winners. They will save you taxes and give you additional returns.

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