GOLD, GOLD, GOLD, GOLD, GOLD,
What is Physical Gold?
What is Digital Gold?
And finally, which is the best method for investing in gold.
Friends, if you had bought gold on October 31, 2016, the price was ₹5,000 per 10 grams. Fast forward to October 31, 2024, and the price has reached ₹8,750 per 10 grams, meaning in the last 8 years, gold has given a compounded return of 13%. Just in the last year, gold has given a return of about 27%.
Now, even though gold has become quite expensive, everyone is seeing it as a potential investment option. There are mainly two perspectives when it comes to buying gold:
- Diversification
- Inflation Hedge
It is believed that gold is a great diversification tool, and it also acts as a hedge against inflation. As inflation increases, the price of gold tends to rise.
Now, let’s talk about the different ways to invest in gold:
1. Physical Gold
Physical gold means you can either buy bullion or jewelry. Now, you know the challenges of buying bullion or jewelry.
- First, you need to go to a trusted jeweler.
- Second, there are making charges involved.
- Third, GST is applicable (3%).
- Additionally, there are storage costs, as you need to store it either at home in a secure locker or in a bank locker, both of which cost money.
In physical gold, the minimum investment tends to be higher because you can’t buy less than 1 gram of bullion or less than 45 grams of a gold chain. For example, to buy a gold chain, you might have to spend ₹60,000.
Liquidity is another issue because when you want to sell it, it’s not as simple as stocks where you just go to the exchange.
You don’t earn any interest on physical gold. While physical gold is easily available at jewelry stores around you, it used to be a mess earlier but is now more regulated. Hallmarking ensures authenticity, and the tax on gold works like this: If you hold it for more than 2 years, you pay long-term capital gains tax at 12.5%. If less than 2 years, your gains are added to your income and taxed accordingly.
2. Digital Gold
Digital gold can be purchased through various apps like the MMTC app or platforms like PhonePe, Digital Gully, and others.
There are some benefits and drawbacks with digital gold:
- No making charges, but GST still applies.
- No storage costs.
- The minimum investment is as low as ₹1.
- Liquidity is excellent, and you can buy or sell at any time.
- However, there is no interest earned on digital gold.
But there are two major problems:
- Lack of regulation, so you need to be cautious about who you are buying from.
- Buying prices are generally higher, and selling prices are lower, so you might incur a loss inherently.
For tax purposes, if you hold digital gold for more than 2 years, it is taxed as long-term capital gains at 12.5%. If sold earlier, it is added to your income and taxed at your marginal rate.
3. Gold ETFs
Gold ETFs are becoming quite popular, and many people are now investing in them.
Gold ETFs are advantageous because:
- No making charges.
- No storage costs.
- The minimum investment can range from ₹50 to ₹1.
- Liquidity is excellent, as they can be bought and sold on the stock market.
- They are highly regulated, as they are listed on the stock market.
However, there is one downside: Gold ETFs have annual charges known as the expense ratio, which can range from 0.5% to 1.5%. For tax, if you sell within a year, it will be considered a short-term gain and taxed at your marginal tax rate. If you hold for over a year, it is considered long-term, and you pay a tax of 12.5%.
4. Gold Mutual Funds
Gold mutual funds buy gold ETFs, so in a way, it’s like a shopping cart where you are buying gold ETFs.
- Minimum investment in gold mutual funds is ₹1.
- No interest is earned.
- Short-term capital gains tax applies after 2 years, and gains are added to your income if sold before 2 years.
- These funds also charge an additional expense ratio of 1-2% on top of the ETF charges.
5. Sovereign Gold Bonds (SGB)
SGBs are a Government of India initiative where the government offers gold bonds at a specific price based on the prevailing gold price.
For example, if you invested ₹1,00,000 at a gold price of ₹5,000 per gram, you would get around 20 grams of gold. These bonds have a term of 8 years, and at the end of 8 years, you get your principal amount back, along with the current market value of gold.
Additionally, the government offers an annual interest of 2.5%.
However, SGBs are not available all the time. The RBI releases these bonds in tranches four times a year. Also, the bonds are not liquid; you cannot sell them before 5 years, and if you hold them for 8 years, there is no capital gains tax on the redemption amount.
The issue is that the supply of these bonds is limited, and the government discontinued this scheme due to the rising prices of gold. The last bond was issued in February 2024, and after that, the scheme has not been launched.
Conclusion for 2025:
The best way to invest in gold in 2025 would be through Gold ETFs or Sovereign Gold Bonds (SGBs), provided they are re-launched. If SGBs are not available, Gold ETFs will be the most efficient way to invest.
For physical gold, only buy it if you value its ornamental worth (like jewelry). Do not buy physical or digital gold for investment purposes due to the wide gaps in buying and selling prices.
If you are planning to buy gold, ETFs are your best bet for 2025.
The following content is inspired by Sanjay Kathuria’s video on gold investment.
