This article will explain the options to invest in gold in India. To make things easy I have created a table in which you can compare each of these gold investment options on multiple points.
If you are yet unclear about the reason why gold is useful to hold in your investment portfolio you can read the previous article on gold investments.
Gold investment comparison
Note to readers on mobile devices – You might have a problem viewing this table. Please view it from a desktop alternatively.
Physical gold- bullion | Physical gold- Jewellery | Gold ETF | Gold savings fund | |
---|---|---|---|---|
What is it? | Bullion – coins, bars, usually in standard weights, 5 gm, 10 gm, 50 gm, etc. | Rings, bracelets, bangles, ear-rings, necklaces etc. If you are an Indian I don’t need to explain this! | A fund which puts investor money in physical gold, usually 1 kg bars | A fund which puts investor money usually in the same fund-house’s ETF scheme. For ETF read adjacent point. |
Purity of gold | 99.5% or 99.9% (24 karat) purity is usually available. But until you do a purity test on the bullion, you have to go by the jeweler’s or bank’s word on purity. |
Usually jewellery will not be as pure as bullion. It will be 22 karat (91.67% purity) or less. Until you do a purity test on the jewellery, you have to go by the jeweler’s word on purity. |
Usually of 99.5% purity | No concept of direct measurement of purity since the savings fund does not hold gold. It will depend in turn on the ETF they have invested in. Read adjacent point. |
Where do you buy it? | Jewellers, Banks | Jewellers | Exchange – BSE, NSE | Mutual funds – online or directly or through their agents. |
Systematic Investment Plan availability | No | No | No | Yes |
How do you store or maintain it? | Needs a locker, safe deposit box for storage. | Needs a locker, safe deposit box for storage. | Gold is held on your behalf in storage vaults and is audited at periodic intervals. Needs a demat account. | Does not need a demat account, accessible to more investors who do not have a demat account. |
Entry charges (other than basic gold purchase price) | Premium charged by jewellers and banks. (Usually 4-6%, banks have higher prices as compared to jewellers) | Apart from the premium mentioned in the adjacent point, there are making charges which are dependent on jeweller you purchase from and also how intricate the jewellery is. | Broking commission charged by your broker when you buy on exchange. No entry load. | Entry load charged by fund-house. |
Holding cost | Locker charges | Locker charges | Management fee charged by the fund-house. Usually 1% of amount held. SEBI says ETFs cannot charge more than 1.5% a year. | Management fee charged by the fund-house. This is highest because they charge in addition to what the underlying ETF scheme charges. Usually, in all, not more than 1.5% a year |
Exit charge | Jewellers will deduct around 3-7% as charges from the buying price on that day. | Jewellery is usually of lower purity. Also will have higher deductions on selling, | Broking commission charged by your broker when you sell on exchange. No exit load. |
Usually, 1.5-2% exit load if you sell before one year. |
Ease of selling | Usually, jewellers will buy back bullion. Banks do not buy back bullion, they only sell it. In India bullion has a liquid market for selling. Reasonably immune from any financial market problems. |
Usually, jewellers will buy back jewellery. In India jewellery has a fairly liquid market for selling. Reasonably immune from any financial market problems. |
Ability to sell – dependent on exchanges, different ETFs have different daily trading volumes. Low volumes might give you a slightly unattractive price. You will get cash by exchange settlement which will take a couple of days (T+2). | Most mutual funds houses will have T+2 settlement. |
Capital gains treatment – Long term |
10% long-term capital gains without indexation, 20% long term capital gains tax with indexation. | 10% long-term capital gains without indexation, 20% long term capital gains tax with indexation. | 10% long-term capital gains without indexation, 20% long term capital gains tax with indexation. | 10% long-term capital gains without indexation, 20% long term capital gains tax with indexation. |
Capital gains treatment – short term |
Short term capital gains added to income tax, tax calculation as per slab you fall under | Short term capital gains added to income tax, tax calculation as per slab you fall under | Short term capital gains added to income tax, tax calculation as per slab you fall under | Short term capital gains added to income tax, tax calculation as per slab you fall under |
Definition of short term and long term | Short term – Less than 3 year Long term – More than 3 year |
Short term – Less than 3 year Long term – More than 3 year |
Short term – Less than 1 year Long term – More than 1 year |
Short term – Less than 1 year Long term – More than 1 year |
Wealth tax | 1% a year for excess wealth over Rs. 30 lakh, bullion is added to assets liable for wealth tax. | 1% a year for excess wealth over Rs. 30 lakh, jewellery is added to assets liable for wealth tax. | No wealth tax | No wealth tax |
Which gold investment option is best?
I have deliberately avoided talking of two options.
- National Spot Exchange – E-gold – You need a separate trading account even if you have a demat account already.
- Mutual funds which invest in stocks of gold mining companies around the world – They carry equity market risk and are not direct gold investment options.
You will have to take a decision based on your needs for liquidity, costs and comfort with respective options. I have listed the factors below for the respective gold investment options.
Physical gold investment
In India, gold has a societal function in certain events in life, a prime example being marriage of a daughter. It is also a culturally accepted gift for a newborn. You may need physical gold. Even otherwise gold is a part of investments in most Indian households.
Storage
For physical gold investments, the biggest question is whether you have a safe storage option. If you have no locker facility, you will have to seriously consider where to keep your gold safely.
Wealth tax
The second question is whether you come under the wealth tax net with the gold you possess. Many people might not even know that they have a wealth tax liability. In many cases, it might be undeclared wealth too.
Purity
You can get physical gold checked for purity. The Bureau of Indian Standards (BIS) has recognized hallmarking centres in various cities.
Click this link for list of BIS approved hallmarking centres for gold in India.
Gold ETF
If you have a demat account already, this is an easy route. You might ask which ETF to choose?
To see all the gold ETFs available in the market and their returns, click here.
Returns
Gold ETFs should do nothing more than track the price of gold. That is their core function. You will see that almost all of them have similar returns. There is not much difference in returns across the gold ETFs in India.
Liquidity
Most Gold ETFs have decent liquidity on the exchange. The key thing to look for is the difference between the buy and sell offers. I should remind you that you will need to see them between market hours to see the buy and sell prices table. It is better if the difference between buy and sell prices is least and there are adequate offers on either side of the table.
To see examples click on the links below.
Expenses
Please go through the scheme details. It takes 5 minutes. Many people skip this and find they have signed up for a scheme that has higher expenses. Every Mutual fund (MF) website has the details.
You don’t have to worry about exit load and entry load in gold ETFs.
Make the effort and consider less expensive funds with lesser management fee. Its your money, after all!
Gold Savings Funds
To see all the gold ETFs available in the market, click here.
Returns
Similar to gold ETFs, gold savings funds should do nothing more than track the price of gold.
Here there is a difference between gold ETFs and gold savings funds. If you visited the link above you will have seen that:
- Gold savings funds are a relatively new financial product in India.
- Sufficient track record not present – only 1 year and less is available.
- There is wide variation in returns across different funds.
It is a game of chance in choosing the right gold savings fund because there is no long-term track record. You will have to take a pick based on limited returns history.
Expenses
Again, as I mentioned for gold ETFs, please go through the scheme details. It does not take much time.
A cursory 10 minute website browsing exercise showed me exit load range of 1.5-2% for selling before 1 year, across different gold saving funds.
Keep in mind that management fee also is applicable in gold savings funds.
For the paranoid
Gold is a sensitive subject for governments and central banks. It can be considered by citizens as a barometer of abuse of money supply by the powers that run a country.
There have been precedents in the past where private gold ownership has been subjected to harsh treatment.
Let me tell you what Executive Order 6102 meant for US citizens in 1933.
- It outlawed private possession of gold bullion beyond a certain allowed limit.
- Citizens were asked to sell gold to the government at around $20.
- The price of gold was subsequently raised by the government to $35.
- That was a straight loss of 75% ((35 minus 20) divided by 20) to gold holders
It might seem fantastic to you but its true. It was an assault on citizen rights and done by an elected government in the USA.
Circa 2012
If it ever came to seizing assets of citizens today under any justification, the financial system makes it far easier than in 1933. All systems are centralized. Records of ownership of assets is present in information systems. Transactions are recorded electronically.
At a basic level, physical gold is safer than ETFs and gold savings funds if you contemplate extreme situations.
Smart Stock Investor Workshop
You should not put all your eggs in one basket when it comes to investment. Equities are an important asset class if you want to grow your long-term wealth. If you have questions about how to choose a good stock and avoid common mistakes in stock investing, you can learn fundamental analysis with Capital Orbit’s Smart Stock Investor Workshop. Click here to see the dates for the next workshop.
Helpful information
Article on Physical gold purity problems in India. Click this link.
Purity tests by MFs- They are carried out by the mutual fund house to ascertain that the gold is indeed of the purity expected. See this link to go through an example of a purity test.
Definition of “assets” under Wealth Tax Act can be understood at this link.
Karat – 22 karat means, 22 out of 24 parts is pure gold. 22 divided by 24 = 91.67% purity. 24 karat usually means 99.9% purity of gold. You can similarly try calculating the purity for 18 karat.
Disclaimer
I urge you to read the disclaimer.
Anil says
For a holding period of 3 years and above, physical bullion (not jewelry) is a more attractive option than an ETF, provided the purchase is done from a wholesale-like bullion market like Chandni Chowk in Delhi, and not from a jeweler in a fancy mall or MMTC or a bank. In a place like Chandni Chowk, the buy-sell spread is likely to be around 1% (it is not fixed, varies every day), while the buy-sell spread in an ETF over 3 years will be around 4% (1% brokerage plus 1% fund expense charge every year). I think buying bullion from an efficient market like Chandni Chowk is the best way to buy and hold gold. It is safe too. There are labs in Chandni Chowk where you can get the purity checked ( costs Rs 25 or so per test, but the actual cost comes to about Rs 100-200 per test because a minuscule amount of metal is lost in the process, that would be a significant percentage cost if the purchase amount is small, but not if the purchase amount is substantial), and there are also independent weigh-bridges where you can get the weight verified ( costs Rs 5 per weighing).
Kunal Pawaskar says
I agree with you Anil with the physical over ETF argument when costs are included.
Ditto about the buying from reputed jeweller part. The new-age banks are especially worst in the amount of spread they charge over the day’s gold rate.
The testing labs in Chandni Chowk information is useful. I was not aware of it since I am from Mumbai. But readers in Delhi will surely benefit from this.
In Mumbai, I had got a free non-invasive test by an X ray spectrometer (if I remember the device right) from the Tanishq store when they had a free offer. I do not know if they still have a free offer going for anyone to walk in and check their gold purity.
Thanks for the info!
Ganesh says
@Kunal – Do you recommend buying silver bullion? Considering how it is much cheaper than gold and it’s value has risen considerably over the past years. Can you do a post on it?
I’m just an 18-y old student interested in investing long term (just for a nest egg). I’m new to investing but I can understand most of what you explain.
Kunal Pawaskar says
Hi Ganesh,
Gold has properties that satisfy the requirements of money. e.g durability, divisibility, compactness etc. One of the more important ones is that it does not have alternative industrial uses. Practically, all the jewellery that Indians use is actually wealth or a store of value. The transactional elements in our cultural events like gold transfers via dowry, gifts etc. are nothing but value transfers.
Like I read somewhere, the fact that gold is not used to a great extent anywhere else, bodes well for its use as money. Sudden additions/reductions to the stock of gold in the system are avoided as a result.
Silver on the other hand does have industrial uses. So, there are questions whether it can be a good store of value.
Still, silver has been used in the past as money. I am not completely confident of the case for silver vs. gold. In fact you could google up bimetallism and see the big debate in the US over the the 19th and 20th century over the use of gold vs. silver as the metals on which a monetary standard could be based.
I will work on a post in the near future.
I appreciate the fact that you have started off in understanding finance so early. I can frankly say that I was not as aware or as interested when I was your age.
See you around on Capital Orbit!
P.S. http://www.amazon.com/Power-Gold-History-Obsession/dp/0471003786
I recommend reading this book to get a good understanding of gold and its use in history.
Swaroop says
In Mumbai too you have labs for assessing the purity of gold in and around Zaveri bazaar. The cost in Mumbai is slightly higher than that of Chandni Chowk. Similarly there are authorized shops which will weigh your gold on electronic scales and issue you the weighing slip for a small fee. Earlier there used to be dharam-na-kanta for weighning of gold/silver and ornaments.
Kunal Pawaskar says
Thanks Swaroop, for sharing this. Anil had shared info. on options to test gold purity in Delhi. This will be helpful for all the Mumbaikars in the Capital Orbit community.
I look forward to interacting with you ahead at Capital Orbit. Wish you a happy Holi!
Vinod kumar says
how safe to invvest in bullionindia.in?
Kunal Pawaskar says
Vinod, I have yet not looked at bullionindia.in in detail. I have seen it only in passing. Let me check it out and get back in some time.
loans today says
Wow, several extremely great suggestions! I appreciate you crafting this posting and the rest of your web site is superb!
YMukthar Basha says
Very great suggestions for people looking into invest in gold. But with the declining trend in the gold pricing at present is this option more advisable.Request Mr.Kunal to advice.
Kunal Pawaskar says
Thanks Mukthar. Over the long-term gold has performed well. Even if the USD price of gold falls, the gold price in INR is determined by our exchange rate. The rupee has only depreciated since independence and it continues to do so. This keeps the gold price in INR on an upward trajectorry over the long-term. It’s a question of allocation to different assets including debt, gold, equities, and cash. I am comfortable keeping up to 10% of my net worth in gold. Whatever you do, don’t over-allocate to any asset class.