Things You Need To Know Before Investing In Gold

While earlier it was the practice to buy and store jewellery and gold coins, in today’s digital age one can buy gold online as well as take a gold loan online in India. Whether you buy physical gold or buy gold online, there are pros and cons to both types of investment. In this article the different types of gold investments and the advantages and disadvantages of each are discussed.

Physical Investments In Gold

Physical gold can be bought in the form of jewellery, coins, biscuits or bars from physical gold stores. You can purchase this by paying upfront or through EMI. Some stores also offer the option for customers to deposit a monthly amount for 11 or 12 months, at the end of which you can buy the item of your choosing. Some may even offer to put in the 12th installment on your behalf.

At the time of purchase, the customer needs to keep in mind the price of gold in the city for that day. This may vary according to the purity or the karat value. 24K gold is the purest and the most expensive. One also needs to be aware of the reliability of the seller. It is best if the purchase is accompanied by a Hallmark and certificate regarding the purity of gold.

Extremely important to note is that part of the cost of jewellery and physical gold goes towards making charges. While you can get a loan against gold, the gold loan in India is based on the value of the physical weight of the gold and does not factor in the making cost. You can get a gold loan by physically taking the gold to a jeweller, bank or NBFC. You can also get a gold loan online, making the gold loan process relatively simple.

The biggest disadvantage of physical gold is the safe-keeping and the costs associated with it – locker charges, insurance or both. Sadly today, even lockers are not totally safe. Gold prices also are prone to fluctuations in the short term. They are affected by import duty and taxes, global prices, market conditions and US dollar dynamics as well as issues of demand and supply. These fluctuations affect the price of both physical gold and the online digital gold products discussed below.

Online Investments In Gold

One can invest in gold online through Digital Gold, Gold Exchange Traded Funds (ETFs),Sovereign Gold Bonds (SGBs) and Gold Mutual Funds

a. Digital Gold: There are several mobile and web applications such as PayTM which allow an investor to buy gold at the click of a mouse for as little as Re 1/-. The gold purchased is stored on the investor’s behalf by the seller and often comes accompanied by a guarantee of safety and purity. You can either sell or avail a gold loan online against it with equal ease. There is also the option to have the gold delivered to you either as a piece of jewellery or a biscuit etc. which usually entails a cost. The factors to consider while buying digital gold is the authenticity of the website/application, integrity of the service provider, making cum delivery charges, as well as the price at which the gold is offered compared to the market price of the day.

b. Sovereign Gold Bonds are bonds offered by the Indian Government. While these offer some tax concessions, investors need to keep in mind the lock-in period, the minimum purchase amount of 1 g, and the maximum purchase amount of 4 kg.

c. Gold Exchange Traded Funds are funds which invest in gold derivatives or hold physical gold. One can invest in it through a demat account. The major advantage is the opportunity to invest in a gold-related product without the responsibility of physical storage.

d. Gold Mutual Funds invest in gold related assets such as physical gold, gold mining companies, Gold ETFs, Gold Futures and derivatives, etc. Investors need to keep in mind the fund manager’s expertise and fund management expenses apart from market conditions while considering this as an investment option. A demat account is also required.

Buying gold online removes some of the disadvantages associated with safe-keeping of physical gold. In addition, for the digitally literate, it is far easier to buy and sell. However, like any other investment product, one needs to consider the risks and advantages associated with each kind of gold investment in order to evaluate whether it is best suited to your needs.

 Gold offers Diversification

Unlike asset classes such as equities or real estate, the value of gold often provides limited correlation with their performance. It behaves exactly what the stock market is doing. In simple words, gold prices may appreciate during periods of stock market decline and vice versa. This characteristic of low correlation makes gold a potentially valuable portfolio diversification tool when included in appropriate proportions.
 

Gold Lacks Income Generation

Those seeking regular income from their gold investments should know that gold does not generate interest or dividends. People usually invest in gold from a long-term capital appreciation perspective. However, as with all investments, there is no guarantee of future price increases, and it is possible that investors may experience a loss of principal.

FAQs

Q1. Is gold a better investment than FD?

Ans. Whether gold is a better investment than FD or Fixed Deposit completely depends on your risk appetite. You should also take into consideration the returns that you expect out of the investment in either of the two methods. A fixed deposit is a safe and highly liquid investment compared to gold. It also offers flexible terms. However, gold on the other hand, is a riskier investment but has also offered better returns in the past. 

Q2. Should I invest in SIP or gold?

Ans. Investing in SIP (Systematic Investment Plan) or gold depends entirely on your goals. While SIPs offer potential for growth and income through mutual funds, they also carry more risk. Gold on the other hand is a hedge against inflation and volatility, and it won't generate income. Consider your risk tolerance, investment horizon (short or long-term), and goals (wealth creation vs diversification) before choosing.