Different ways to buy and invest in gold

Gold in the form of jewellery is not only used as wearable but also works as a tool to tide over financial emergencies. So, buying gold has traditionally been a financial support system over the years.

There are two ways of owning gold - a) paper and b) physical. You can buy it physically in the form of jewellery, coins, and gold bars. In the paper form, one can buy gold, one can buy it as gold exchange-traded funds (ETFs) and sovereign gold bonds (SGBs). Then there are gold mutual funds which further invest in gold ETFs. Some gold mutual funds invest in the shares of international gold mining companies.

For buying physical gold, one may reach out to the neighbourhood jewellers. However, after covid-19, many reputed jewellers have allowed customers to buy gold jewellery online via their websites. Even payment apps such as Paytm, PhonePe, Google Pay etc have tied up with gold jewellers to sell gold coins.


PHYSICAL GOLD

• Jewellery

Indians certainly cherish possessing gold. But owning it in the form of jewellery has its own concerns about safety, high costs, and outdated designs. Then there are the 'making charges', which could prove to be a costly affair. The making charges on gold jewellery depends on the type of design and whether the ornament is handmade or machine-made. If the design on gold jewellery is intricate, then there will be high making changes.

• Gold Coins

Gold coins can be bought from jewellers, banks, non-banking finance companies, and now even e-commerce websites. Gold coins and bars are of 24 karat purity and 999 fineness carrying advanced anti-counterfeit features and tamper-proof packaging. All coins and bars will be hallmarked as per the BIS standards.

• Gold savings schemes

To make gold buying more affordable, many jewellers have launched gold savings scheme. A typical gold savings scheme allows you to deposit a fixed amount every month for the chosen tenure. When the term ends, you can buy gold (from the same jeweller) at a value that is equivalent to the total money deposited, including a bonus amount. This conversion is done at the gold price prevailing on maturity. In most cases, the jeweller adds a month's instalment at the end of the tenure as a cash incentive.

Some jewellers have waived making charges on the gold bought from the amount deposited to make the scheme attractive.

Click here to know more about the Gold saving schemes of jewellers.

PAPER GOLD

• Gold exchange-traded funds (ETF)

An alternate way of owning paper gold in a more cost-effective manner is through gold exchange-traded funds (Gold ETF). Such investments (buying and selling) happen on a stock exchange (NSE or BSE) with gold as the underlying asset.

What's more, the high initial buying and even selling charges that go into owning jewellery, bars or coins give an extra edge to the low-cost gold ETF. The transparency in pricing is another advantage. The price at which it is bought is probably the closest to the actual price of gold and therefore the benchmark is the physical gold price.

What you need is a trading account with a stockbroker and a demat account. One may either buy in a lump sum or even at regular intervals through systematic investment plans (SIP). You may even buy 1 gram of gold.

Even though there are no entry or exit charges there are three costs that come with gold ETFs. One is the expense ratio (for managing the fund) which is generally low compared to other mutual funds and is around 1 percent. Second, is the broker cost that needs to be accounted for every time you buy or sell gold ETF units. Third, which technically is not a charge but impact returns is the tracking error. It arises because of the fund's expenses and cash holdings thus not mirroring the actual gold price.

• Sovereign Gold Bonds (SGB)

Sovereign Gold Bond is another way of owning paper gold. They are issued by the government but availability is not 'on-tap basis'. Instead, the government will intermittently open a window for the fresh sale of SGBs to investors. This could typically happen every 2-3 months and the window will remain open for about a week. For investors looking to purchase SGBs anytime in between the only way out is to buy earlier issues (at market value) which are listed in the secondary market.

One can also invest in SGBs by opening account with the RBI Retail Direct.

Click here to know 7 watchouts before you fit sovereign gold bonds into your financial plan

• Digital gold

Customers can buy 'digital gold' using payment apps such as Paytm, PhonePe and Google Pay. The customers can buy gold from Re 1. Most of these payment apps have tied up with MMTC - PAMP (a joint venture between public sector MMTC and Switzerland's PAMP SA) or SafeGold to sell gold.

To know more about these two digital gold options, click here and here.

Making a choice
The initial cost of owning physical gold in the form of bars or coins is anywhere around 10 per cent and it is even higher for jewellery. SGB and Gold ETF, both paper-gold, are cost-effective as there is no entry cost in SGB while costing for gold ETF could be around 1 per cent.

SGB should benefit those who want to invest in gold for a longer period as its maturity is after 8 years, although the lock-in ends from the fifth year. However, gold ETF provides much better liquidity than SGB. Owing units is much easier than SGB as it's entirely online in the case of ETFs. The risk of owning, holding also doesn't exist in both.

One needs to look at the taxation aspects as well. Gains in SGB at the time of maturity are tax-exempt. However, the taxation rules in case of mutual funds and ETFs have been revised from April 1, 2023. As per the new rules, if the equity portion in the mutual fund scheme or ETF does not exceed 35% during the financial year, then such mutual fund schemes and ETFs will not be eligible for indexation benefit. Usually, gold mutual funds and ETFs do not have such exposures.

Further, gold ETFs and gold mutual fund schemes units won't earn the additional interest of 2.5 per cent per annum as you would get for SGBs.

Get clarity as to why you need to invest in gold - is it for marriage purpose or for pure investment. For investments, one should not have more than 10 per cent of the total portfolio in gold. Choose between Gold ETFs or SGBs depending on how comfortable you are managing investments online and keep the worries of purity and security aside.