Why buy gold? and How to buy gold? are the 2 most asked questions among investors right now in India and around the world. And more so, because of the current market conditions. Everyone is looking to safely store their net worth in a hard asset that isn’t unlimited like fiat (₹ or $). So let’s directly get into it after a quick TLDR
Why?
How to buy?
And now for those who want to know in detail about the How & Why behind buying one of the most precious metals, which Robert Kiyosaki – the multi-millionaire author of Rich Dad Poor Dad calls to be “God’s Money”.
Why buy Gold?
History
It has been attacked for thousands of years by bad actors, banks, central banks, nations etc. but it stood the test of time and is still bought & sold to this day.
Limited
It is limited and can’t be printed out of thin air.
Returns
It has given an approximate annual return of 10.1% (CAGR) in the last 30 years. So it outperformed Fixed Deposits (FD).
Hedge against inflation
It has historically been an excellent hedge against inflation because its price tends to rise when the cost of living increases. With unlimited currencies (₹, $) being printed by the central banks, people tend to believe bitcoin & gold to be real money.
Provides liquidity
At the time of need, investments in gold can be liquidated much faster than other physical assets like real estate. Unlike many other assets, there is no lock-in period in gold investments except for sovereign gold bonds (SGBs). So it provides immense liquidity to a portfolio.
Geopolitical factors
It performs very well during geopolitical tensions like nations fighting among each other, governments going bankrupt etc.
How to buy Gold?
There are 4 ways to buy genuine gold at the best rate in India and I will rank them in order – starting from the best to the worst as per my personal opinion:
1. Physical Gold
You can buy physical gold coins or bars from any trusted jewelers or banks with a hallmark of purity.
Pros
- As famously said – it’s not your gold until you can touch it. So physical form is one the most preferred ways to hold gold specifically in India.
- You do not depend on a 3rd party for its storage so during geo-political turmoil it is harder to seize.
Cons
- High premium (making charges etc.) as the jeweler or bank converts the raw gold into coins or jewelry.
- Costly & risky to store or hold.
2. Sovereign Gold Bonds
Sovereign gold bonds or SGBs are government securities issued in the units of grams. It is available in paper and Demat form and is issued by the Reserve Bank of India (RBI).
Pros:
- Doesn’t require any physical storage so no fear of theft. Everything is safely held in your Demat account.
- Government offers a fixed annual interest rate on your SGB investment. This interest payment is divided into 2 parts and is paid every 6 months to the investor. Irrespective of whether the cost of gold rises or falls, you are guaranteed to receive the interest.
- It has tremendous tax benefits. No TDS (Tax Deducted at source) is applicable on the interest you receive from your SGB investment.
- You are also allowed to transfer the bond before maturity and gain indexation benefit. And if you redeem the bond after maturity, even the capital gains tax will be exempted. However, the interest is fully taxable as per your income tax slab.
Cons:
- It has a long maturity period of 8 years. Though you can sell it any time on stock exchanges like NSE & BSE; but often there is a lack of volume.
So how it works?
- Let say, Gov issues 1g of SGB at ₹100.
- You bought it.
- Now you will get 2.5% (fixed rate) every year on your initial investment of ₹100.
- So every 6 months you will receive ₹1.25 even if the gold price goes up or down.
- Let’s say at the end of 8 years (maturity period) 1g of gold is ₹250.
- You will get ₹20 (₹2.5*8 years) extra as interest.
- So for ₹100 of SGB, you got ₹270 (₹250 gold value + ₹20 interest earned).
3. ETFs
ETFs or Exchange Traded Funds are a type of Index Funds that are directly listed and traded on stock exchanges like NSE or BSE. An Index fund tracks a certain index like Nifty 50, Sensex, etc. Similarly, ETFs also track an index, a commodity or bonds.
So there are gold ETFs listed on stock exchanges (like GOLDBEES) that directly track gold price. If the actual gold price increases, the ETF price also increases and vice-versa.
Pros:
- No physical storage required so no fear of theft. Everything is safely and securely held in your Demat account – it’s like owning gold without actually having it in your hand.
- Purity of the gold is guaranteed as each unit is backed by physical gold of high purity.
- You can trade ETF just like a stock. So you buy or sell anytime you want, provided the exchanges are open.
- Very tax-efficient as there is no wealth tax, security transaction tax, VAT or sales tax. The income earned from them is treated as long-term capital gain (LTCG) tax.
- ETFs are also accepted as collateral for loans.
- No entry and exit load.
Cons:
- When you sell the ETF you will receive cash and not physical gold.
- You will need a Demat account with any brokerage houses (like Zerodha) to buy ETFs. So there will be a transaction cost and the annual account maintenance charges.
- There is also an expense ratio – a small price charged by the company (like Nippon India) for maintaining the ETF.
- ETFs aren’t 100% accurate – means it always doesn’t track the exact gold price, as shown below
4. Digital Gold
It is a mode of investing in physical gold through online platforms like Kuvera, Paytm, PhonePe etc. This physical gold is safely stored with the vendor which can be redeemed as physical gold or be can resold to the vendor for cash.
Pros
- Easy to store/hold.
- High liquidity (volume) i.e. can be bought or sold anytime.
Cons
- Price is always higher as compared to the market.
- Very different prices in different apps or platforms.
And among the above 4, I didn’t mention gold mutual funds which many uses – the only reason being these funds ultimately buy ETFs and also have a higher expense ratio than those ETFs they are buying. So it is always better to directly buy that ETF.
My personal holding
In my personal portfolio, majority of gold is in the form of SGBs because of its interest payment and I do weekly SIP in Gold ETFs. My parents already have all their gold holdings in physical form (Jewelry, Coins).
Gold is money. Everything else is credit.
– J. P. Morgan
And as I always say, please don’t take this as investment advice; I am in no way a certified investment advisor. This is just a one-to-one talk about helping and motivating you to start your investment journey as fast and with as little money as possible.
Also never forget our life mantra: Save Invest Repeat. And do let me know which particular way you think is the best for investing in this precious shiny metal. Talk to you on Twitter – @InvestRepeat. Also, you can join my private Telegram channel (Username: InvestRepeat).
Your man,
SIR
