We Indians are in love with gold. While many of us consider it as an auspicious metal ideal for festivals and occasions, it is also an easy and risk-free investment option. Traditionally gold jewelry, coins and bars were the form of investment. However, today, other forms like gold funds are also making their space in the gold investment market. Although, demonetization brought down the gold market in the end of 2016 to a large extent but slowly the gold rate has increased because of its increasing demand. One of the major reasons why people invest in gold is because even during inflation, gold offers a hedge against currency or economical risks; secondly, because of the need to diversify their overall investment portfolio.
Before you go ahead and invest your hard earned money on gold, make sure that you know and understand the following facts.
Gold Is Not Really an Investment
Many experts don’t consider gold as an investment as its output is different from other types of investments. It is more like a hedge against economic shocks in the future. The outcome of these investments depends upon the gold rate in India, which can go up or down purely based on its demand and supply.
Jewelry Is Not a Good Gold Investment Option
Jewelry is the most common and traditional form of gold investment. However, buying jewelry an investment is not considered as a good option. This is because the buying cost of gold jewelry also includes making charges (10% to 40% of the total gold rate) but when it comes to selling the same piece, the making charges are deducted along with wastage charges. Thus, getting the true value of your jewelry becomes difficult.
Gold Investment Comes In Different Types
When it comes to investment, gold has different forms. Each of these options has their own pros and cons. However, one must make an investment carefully as per their needs. Other than jewelry, following are the types of gold investments.
- Gold Coins or Bars: If you are looking for long term gold investment then coins and bars are good options. You can buy them from the banks or authorized gold jewelers. Also, one can get easy cash with no additional deductions while selling them to the jewelers.
- ETF (Exchange Traded Funds): This is an easy buy & sell, non-physical form of gold investment with zero storage charges or theft issue. However, the fund house charges a small commission (1%) of the total portfolio value. To invest in ETFs, the investor should have a demat account.
- Gold Savings Funds: These are basically fund of funds that will invest in Gold ETFs on your behalf. This is like investing in any other mutual funds and one does not require any demat account. Unlike ETFs, SIP investment is possible in these gold funds. However, annual management charges are applicable, making this a little expensive option.
- Equity Based Gold Funds: In this form of investment, one does not invest in gold but the companies who are involved in mining, extracting or marketing of gold. The profit and loss in this investment totally depend upon the performance of the fund companies. Therefore, it is recommended to thoroughly research about the company and its management before investing.
The Profits on Gold Investments Are Not Guaranteed
One of the reasons that makes gold is one of the most popular investments is because it is risk free and the gold rate is not directly linked to inflation or currency rate. However this does not mean that the gold prices are going to be stable. Largely, its price is hugely dependent on the demand and supply at any given period of time. If the demand decreases, they are chances that the gold price will also decrease.
Check for Purity & Price of Physical Gold
Before investing in any form of physical gold, one must make sure of few hallmark and symbols that signifies that the gold is pure. These symbols are Purity Grade, a 3 digit number that represents the purity of the gold; a triangular stamp representing the Bureau of Indian Standards; BIS Hallmarking Center Logo; an Alphabet Code that represents that year of gold mark and Jeweler Identification mark. Also, check the gold rate in India on the purchasing day. Since, the price depends upon the demand, there might be slight difference in the gold prices. These changes can be seen as per the regions as well. For example, gold rate in Kerala will be different from gold rate in Chennai.
There Is No Recurring Income in Gold Investment
With the exception of dividend option in gold ETF, gold investment does not yield any recurring income. It is just an outflow of cash. In case of physical gold, one might have to pay for the maintenance of lockers.
5-10 Is an Ideal Percentage for Gold Investment
Out of your overall investment portfolio, 5-10% is ideal to invest in gold that includes coins, bars, ETF and other gold funds. Even though it is a risk free option, experts recommend not to invest too much on gold. It is more of a symbol of wealth and a hedge against economic crisis.
Gold Scores the Highest In Liquidity
As compare to other investment options, gold has the highest liquidity. You can use them as collateral to get loans. You can get your gold and convert it into cash any day. However, with gold jewelry, the making and wastage charges are deducted from the total amount that one gets in exchange of gold.
Gold Investments Are Convenient
With the rise in demand of gold ETFs and other funds, short term investment in gold has become way easier. So, instead of holding cash, one can easily invest in gold.
Gold Investments Are Not Tax Free
When you sell the gold asset (jewelry, coin or ETFs) within 36 months of its purchase, then it will be considered as short term capital gain. This will be added to your regular income and is taxable according to the prescribed income tax slab. In case, you sell them after 36 months, then it is considered as long term capital gain and will have a separate head. In this case, a tax rate of 20% (+ surcharge and education cess) will be applicable. In cases where the gold is received as a gift on the occasion of marriage or as inheritance or has an aggregate value of less than Rs. 50,000 a year, then it will be exempted from tax.