Explained: All you need to know about gold investments in India

Updated : March 16, 2021 09:46 AM IST

While there are a lot of different investment opportunities available to investors in India, gold is surely considered a safe haven by many.

While there are a lot of different investment opportunities available to investors in India, gold is surely considered a safe haven by many. People buy gold more for its safety than for its returns. Gold and stock correlation are inversely proportional. This means, when the gold price goes up, prices in the stock market will fall; thus, investing in gold can provide a hedge of protection against the bearish market with an add-on benefit of diversification.

How much percentage in your portfolio should be allocated to gold is subjective; It depends on various factors such as one’s risk-return characteristics and expectations, degree of risk aversion, age, liquidity needs, investment horizon, income, and stability of income.

A risk-averse person will keep his portfolio more diversified by selecting investment avenues that have a negative correlation to equity markets and hence will allocate more to gold (15 percent to 30 percent in gold). On the other hand, an investor with a high-risk-taking capacity might not allocate a high percentage of their portfolio to gold (0 percent-15 percent in gold).

How to invest in gold?

There are various ways to invest in gold:

1. Gold Fund of Funds (Mutual Funds)

o These are funds that invest in ETFs that are investing in gold

o Usually, the expense ratio is low and it ranges from 0.09%-0.20% as these are passively managed funds

o These are open-ended funds but can have an exit load of 1 percent if redeemed before 365 days. However, funds such as Nippon India Gold Savings Fund have an exit load only for the first 15 days. One should prefer funds that have lesser days in their exit load

2. Digital Gold

o The main benefit of purchasing digital gold is its low denomination and high liquidity

o One can sell the gold whenever they would like to and the sale takes place at live market prices

o Some platforms also allow for physical delivery of Gold

o The investment is backed by real gold in a storage facility

o Purity is also a criterion to be investigated

o A major disadvantage of buying digital gold is the absence of a regulatory mechanism

3. Sovereign Gold Bonds

o The main benefit of SGB is that it is risk-free and that no management fee is charged

o The main drawback of SGB is lack of liquidity due to lack of depth in the market

o It pays an additional 2.5 percent interest per year which makes it the best gold investment option if one is looking to invest for long term

o The capital gain on selling is tax-free if the investments are held till maturity which makes SGB’s very distinct from other gold investments which have to be charged for capital gains

4. Gold ETFs

o ETFs usually invest in an underlying asset. Here, the underlying asset is gold

o Its expense ratio is significantly lower than buying jewelry or a Gold Savings Scheme but they can have demat charges associated with them

o Gold ETF’s are listed on stock market and one should invest after considering the tracking error and the ETF’s liquidity

o The expenses ratio does not cross 0.20 percent

5. Gold Savings Schemes

o The scheme basically allows people to set aside money for purchase at a later date and it also provides a discount on purchase

o The schemes are suitable for people with less money on hand and require gold in physical form

o From an investment perspective there are many other options that have a significantly lesser expense ratio

6. Jewelry:

o Jewelry should never be an investment option. As jewelry attracts a significant amount in making charges and GST on making charges as well which can reach as high as 25 percent of the gold cost.

o It is highly illiquid.

o Attracts the risk of theft

7. Gold Bars and Coins

o If one wants physical possession of gold, investing in Gold Bars and Coins can be a good choice

o Cost: 3 percent GST + Making Charges (Lesser than jewelry) +5% GST on making charges

Taxation on Gold in India:

❖ When Selling

● There are no capital gain taxes on sovereign gold bonds if the bonds are held till maturity, while all other gold investment products attract capital gains.

● The capital gains tax structure for gold investments is similar to debt instruments where the short-term capital gains are taxable directly through the income of the selling investors and the long-term capital gains are charged at 20% with indexation benefits.

❖ When Buying

● The most recent budget announced that the import duty on gold will be reduced to 7.5 percent thus making it cheaper and in line with the previous tax structure.

● An additional Agricultural Infrastructure and Development Cess of 2.5 percent will be added to custom duty.

● GST of 3 percent on selling of Gold and GST of 5 percent on the making charges of jewelry items, gold coins and bars.

How should Gold perform now?

There are a range of factors that go into answering this. We have considered some factors here to get an idea about the trend:

1. Inflation

Inflation and gold prices are correlated. The presumption is that people will withdraw more from fixed deposits as the rupee devalues and they’ll park their money in gold. Inflation in India was seeing a decreasing trend till last year when it started rising again fueled more by the pandemic and its aftermath.

The Monetary Policy Committee has also restrained from reducing interest rates this time due to the early alarms of inflation ringing. Thus, looking at a broader picture, inflation could rise in the coming 2-3 years and gold might provide a good hedge. According to various economists and experts, upcoming worldwide inflation is imminent.

2. Foreign exchange rate

India purchases all the gold in USDs. Thus, bearing the exchange rate risk as well. The United States Government has recently announced huge rounds of stimulus to boost their economy and spending. This will have an obvious impact on the value of the dollar which will devalue further. This will lead to a stronger rupee but to save the export industry in India, RBI will most likely intervene to keep the exchange rate in check.

Thus, commenting on the course or direction of the foreign exchange rate is quite immature right now but what is generally seen is if there is inflation in the United States, the gold price rise in the US will lead to the rise in prices of the gold worldwide.

3. Business cycle

India is witnessing a huge inflow of FII and FDI due to the pandemic. This huge liquidity along with a continuous buying of the domestic investors as well has raised a question about the overvaluation of equities in India and it is highly likely that the bubble might burst anytime bringing equities to their fair valuation once again in a year or two which will eventually lead investors to park their money in gold, fearing bearish period. Hysteria is quite visible in markets right now. Thus, it can be a good idea to invest in gold right now going solely by the business cycles.

4. Crude oil prices

Crude Oil prices have started rising a bit once again. During a time when the Government is suffering fiscally, it won’t be able to absorb losses in crude oil and thus will have to pass on the effects of rising prices to people which will eventually increase inflation. Higher inflation might also lead to an increase in the prices of gold.

Conclusion: If gold is not a part of your portfolio allocation, the recent price corrections can be a good time to start to purchase gold. You can start with staggered purchases over the next 3-6 months with an investment horizon of 3-5 years.

The author, Saumya Shah, is the Founder of Tarrakki.com -- a comprehensive wealth management platform. The views expressed are personal.

Published : March 16, 2021 09:44 AM IST

Explained: All you need to know about gold investments in India

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