We all know about India’s obsession with Gold.
Our women want it for jewellery, our elders want it for their children’s marriage and our very own Bappi Da wants it for his clothes.
But one more segment of the population also wants gold - the Investors.
Yes, we all know this too. Gold is predominantly seen as a product to invest in.
So today I’ll talk about whether you should or should not invest in gold, and if you do, then which mode of Gold you should purchase.
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Coming back, to talk about whether you should invest in Gold - yes, you should. A little bit of diversification always helps. Gold has had a history of protecting investors’ portfolio when there is inflation, or when the stock market is down.
Too much gibberish. What does this mean?
It means that it is typically observed that if the stock market falls, Gold prices rise. Also, when there is high inflation, gold prices also rise, so that means your investment value is rising. So, like I said, it wouldn’t hurt to have Gold as a product which is a part of your investment portfolio.
But how much? That depends on your goals. If you’re someone who needs gold for their children’s wedding (or your own wedding), then buy it as and when you like. But purely from an investment perspective, it’s not advisable to invest most of your money in Gold. Personally, I don’t have any gold investments, but I’m starting soon, and when I do, they won’t be more than 10% of my total portfolio.
So that answers question 1 - should you buy gold. The answer is YES. You should. It’ll help you diversify.
Coming to question 2 - How and from where should gold be bought?
A lot of people buy jewellery saying “It’s an investment!”. Bro, IT’S NOT!
Jewellery is NOT an investment. Yes, if you like to buy it to wear it, go ahead. But don’t call it an investment. And here’s why - any kind of jewellery has making charges in the double digits (Tanishq’s making charges start at 8%). So if you bought gold jewellery at the rate of 50,000 per 10 grams, you’re actually paying (50,000+8% of 50,000) = 54,000 for 10 grams. And this is assuming 8% making charge, which is pretty low. Jewellers also charge as much as 20%, which would make your landed cost Rs. 60,000. There’s a very low chance that this would actually give you good returns when you sell it (if you do sell it, that is).
So if not jewellery, then how do you buy gold?
There are 4 ways:
Physical Gold: This is the most standard form of Gold that we Indians generally buy from any jeweller from an investment perspective - Gold coins or bars. This doesn’t carry high making charges whatsoever and if it is hallmarked, it is pure (from a safety perspective). However, there are better options that can be used to invest in, which are given below.
Digital Gold/e-Gold: This can be purchased online from any of the hundred different apps that sell gold (Paytm, PhonePe are two of the hundred apps). How this works, is that you buy gold units digitally, in grams, and the company you have purchased from actually buys that many physical units and stores them in a safe vault. (Technically, Paytm and PhonePe have tied up with another company such as MMTC-PAMP, SafeGold etc, who purchase this gold on your behalf. Paytm/PhonePe simply act as the transaction platform). The advantage here is that you don’t have to worry about storing the gold in your safe or locker - MMTC/SafeGold does that for you in their vaults. And if you ever want to redeem the physical gold you have purchased, it can be done via the same app which was used to purchase it (Paytm/PhonePe etc) in the form of coins/bars. The advantage here is that since these are established companies and not small jewellers, they’re safe to purchase from. Secondly, you can setup a sort of SIP, where you tell the app to purchase X units of gold every month and build a good corpus for yourself. No need to physically go to the jeweller to buy coins/bars.
Gold ETF: This is another good option, where you invest in Gold Exchange Traded Funds (ETF). These ETFs are nothing but Mutual Funds that invest in gold, and you can trade these units on the stock exchange. You basically buy units of these Mutual Funds, where 1 unit of the ETF is equal to 1 gram of gold. Here, you pay a (low) expense ratio for the units purchased (expense ratio is the cost of management of a Mutual Fund that the Fund house charges to the investor). The advantage of an ETF is that you can trade it on the stock exchange at live rates, and since ETFs are highly regulated by SEBI, there is no chance of a fraud in terms of rates. The disadvantage however, is that you need to have a demat account for this. Here too, you can do an SIP and keep making investments every month in X units of gold. As we all know, the advantage of SIPs is that your costs of owning the units gets averaged out, so the volatility in prices doesn’t affect you as much.
Sovereign Gold Bond (SGB): If you’re a long term investor in gold, SGB is the best option for you. An SGB, as the name suggests, is a bond issued by the RBI on behalf of the government. Now, how bonds work is a very different topic (which we will cover some other time), but for simplicity, just understand that every unit of the bond is equal to 1 gram of gold. So if you buy, say, 5 units of the Sovereign Gold Bond, that means you are paying an equivalent of 5 grams of gold. The price of the bond changes in line with the price of gold. So if the value of gold appreciates by 10%, the value of the SGB will also appreciate by 10%. Why this is the best option to buy gold is because along with the appreciation in value, you also get 2.5% interest every year on the initial investment amount. This interest is received until 8 years (which is the maturity of the bond). The only catch here is that there is a 5-year lock-in period for SGBs, which means once you invest in SGB, you cannot sell the bond back or trade it for a minimum period of 5 years. Your money stays locked in for those 5 years. Hence, it’s a great option if you’re a long term investor. SGBs have other advantages as well, such as no tax if held till maturity, a discount of Rs. 50 per gram on purchase etc. You can apply for SGB on the website of select banks across the country and purchase the bond with or without a demat account.
At the end of the day, which mode of gold you purchase depends on your requirement. For example, even though Sovereign Gold Bond is a great way to invest in gold, if you’re not comfortable with the lock-in period, you could opt for ETF or digital gold. Typically, physical gold should be the last option for investors, as the others offer many more benefits such as price transparency, ease of transactions, purity etc. One thing that you should NOT buy as an investment, is, like I said, jewellery.
That’s it folks. If you have any questions, shoot out an email to me by replying to this newsletter (if you’re reading it on mail) or comment with your query on the post. I’d be happy to clarify!
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Another drawback of investment in gold is that you can't sell it at market price... it's always sold at 2.5% to 3% below the market price.. this is atleast the case with digital gold, not sure if it's same with SGB