Different Options of Investing in Gold - Insight - Blog Site of BanyanFA LLP (2024)

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Gold has always been a core part of an investment portfolio of every household, specially in India. This gold gets passed upon from one generation to another and in many cases builds a strong financial foundation of the households. Along with the gold passes upon a saying “Do not sell your gold except in case of dire emergency”. In earlier days, the only way to acquire gold was buying Gold jewellery or physical gold in the form of gold coins or gold bars. Times have moved upon and with the rising price of the yellow metal, financial institutions have realised that it may be difficult for a person to buy a single gold coin / gold bar in one go. Further issues such as Gold purity and custody of gold after purchase is an ever increasing problem. Lets evaluate different options available for an investor in the Financial Market to invest in Gold.

Physical Gold via Jewellers

This perhaps the most common way of buying gold / silver in India. Most of the families have their trusted family jewellers from whom they would prioritise most of their jewellery / gold shopping. The reasons are many, but the most common reason is trust which has been in place for generations and ability to use cash to buy gold. I might not be over stating, but this may be the easiest form of investing untaxed money as the family jewellers may not ask for tax related formalities. The biggest disadvantages of buying gold in this manner is that often the gold is not as pure as the jewellers state it to be and is one of the biggest source of money making for the jewellers.

Tax Treatment for Physical Gold

1. Wealth Tax Treatment : Physical Gold gets classified as ‘Wealth’ under the Wealth Tax Act and any value over 30 lakhs of your wealth attracts 1% wealth tax.
2. Income Tax Treatment : Gold needs to be held for 36 months before its gains can be classified as long term capital gains and attracts tax of 20% (with Indexation). Gold sold within 36 months gets added to the normal income of the person and attracts slab based taxation.

Physical Gold via Banks & Financial Institutions

Those who don’t have jewellers on whom they can trust tend to rely on the banks who sell gold coins for investment purposes. Gold is available for purchases in multiple denominations starting from 0.5 grams upto 50 grams. At times the bank on special request provide gold bars weighing 100 grams to 1 kilo. The biggest advantage of buying gold via banks is reliance on purity of gold which is in most cases is stated to be 99.99% pure.

Amongst the disadvantages of buying gold via this mode is

• A big Premium charged by banks for the sake of purity. At the time of writing this article, the spot gold prices are 2667 Rs. per gram, while the price charged by one of the banks (ICICI Bank) is approximately Rs. 3,500 per gram. The heavier your gold coin is, the more discount you get on this rate from the bank.
• You need to pay via cheque in order to buy gold. Any amount over Rs. 50,000 attracts KYC requirements and is possibly reported to Income Tax authorities. This is not really a disadvantage, but people tend to avoid investments which gets reported to tax authorities.

e-Gold via National Spot Exchange Limited (NSEL)

This is one of the newest forms of buying gold / silver. You might be familiar with buying shares in demat form. The form of buying gold via NSEL is termed as e-Gold and is delivered in demat form only. You cannot buy gold in physical form from NSEL. However, once you buy Gold in demat form, you have an option to convert your digital gold into physical gold by placing a request to take physical delivery of your gold. Till the time you do not take the delivery in physical form, you tend to enjoy the following benefits :

1. Assured 99.5% purity level of Gold.
2. Same price irrespective of quantity purchased. You can purchase as little as 1 gram of gold.
3. Selling gold electronically via demat account;
4. Head ache of safety / custody of your gold is taken care of by custodian appointment by NSEL.

Disadvantages

A couple of reasons why e-Gold didn’t go that far are owing to the following restrictions / disadvantages associated with it :

1. You need to open specific commodity only demat account and can not use your existing demat account where you hold your Equity Shares. Even here, the list of available DP (Depository Participants) are limited and do not have all high street famous names / banks.
2. e-Gold attracts the same tax treatment as Physical Gold and hence is not investor friendly.
3. There are several costs which are involved while buying and maintaining your holding of e-Gold with NSEL. These costs are :

• Upfront Brokerage costs charged by the respective broker which takes your order to purchase e-gold units. It can range from anywhere between 0.1% to 0.75% of the value of the gold.
• Yearly DP charges – Considering that it would be a seperate Demat account for just your commodities portfolio, you would have to pay for the demat charges on an annual basis only for your gold / silver holdings. These charges are generally Rs. 300-500 per year.
• Transaction Charges : levied by NSEL are Rs. 20 per lakh or 0.02%.
• Storage costs : These are charged by NSEL at 60 paise per unit of gold and are billed on a monthly basis. If you bought gold on 25th of the month and NSEL bills the storage charge on 30th, then you would be charged for the entire month’s storage cost. At the current price of gold, the this seems to be at around 0.02% of the value of the gold on a monthly basis or 0.27% per year.
• Delivery Charges : are charged at Rs. 200 per delivery request irrespective of the number of units of gold being taken as physical delivery.
• Making / Packing charges : These charges are applied at the time of taking physical delivery by NSEL (Rs. 200 for 8 gm or 10 gram, Rs. 100 for 100 gm of coin / bar).
• VAT : In addition to above, you would have to shell 1% VAT on value of gold at the time of converting your demat Gold into physical gold.

Gold Exchange Traded Funds (ETF)

If you were able to understand what eGold is and how to invest in gold via eGold then Gold ETF would sound you a bit similar. Like eGold, Gold ETFs are digital form of investing into Gold. Gold ETFs are mutual funds which can not be bought like normal mutual funds. ETFs are listed on stock exchanges and in order to buy ETFs, investors need to place a buy order on a stock exchange via a stock broker (just like purchasing shares from stock markets). For more details on ETF please visit our article A Peek Into Exchange Traded Funds.

Some of the aspects associated with Gold ETFs are :

• You need to have an account with the stock broker. The stock broker can be the same as your Equity Stock broker;
• Demat account. If you already have a demat account for your Equity shares then the same demat account can be used;
• The broker would charge a brokerage fees (same as eGold purchased from NSEL) to place an order on your behalf. The brokerage rates can be any where between 0.1% to 0.75% of the value of the ETF order.
• One unit of Gold ETF reflects 1 gram of gold. The minimum purchase quantity is hence 1 unit.
• Gold ETF invests directly into physical gold. Safety and purity of the gold is the responsibility of the Fund.
• Gold ETF prices are directly reflecting the gold prices prevailing in the international markets.
• Gold ETFs can not be physically converted into Gold like eGold. The only alternative available with the investors is to sell their holdings in Gold ETFs and purchase Gold from bank / markets.
• Since Gold ETF is a mutual fund, they levy a yearly investment management charge. This charge is generally between 1% to 1.5%. SEBI has regulated these charges to a maximum allowable of 1.5% of the fund value.
• Tracking Error – reflects how closely the price of Gold ETF moves with the actual gold prices. The lower the tracking error, the better an ETF is. You might be wondering that why do we have a tracking error considering that Gold ETF invests only in Gold. The reason is that Gold ETFs are allowed to invest upto 10% into Money Market instruments and hence based upon the fund manager, this can reduce or increase the tracking error on the Gold ETF. It also depends upon the liquidity of gold in the market which may prevent a fund manager to buy Gold immediately and hence reflect upon the price of the Gold ETF.

The list of Gold ETFs currently listed in India are :

1. Reliance Gold Exchange Traded Fund-Dividend Payout Option
2. UTI GOLD Exchange Traded FundHDFC Gold Exchange Traded Fund
3. Birla Sun Life GoldExchange Traded Fund
4. ICICI Prudential Gold Exchange Traded Fund
5. KOTAK GOLD ETF
6. Quantum Gold Fund (an ETF)
7. Religare Gold Exchange Traded Fund
8. SBI GOLD EXCHANGE TRADED SCHEME
9. Gold Benchmark Exchange Traded Scheme (Gold BeES)
10. Axis Gold ETF

Tax Treatment for Gold ETF

1. Wealth Tax Treatment : Gold ETFs are exempted from Wealth tax and hence do not attract 1% wealth tax.
2. Income Tax Treatment : Unlike other form of holding Gold, Gold ETFs get eligible for being classified as Long Term Capital after 1 year of holding the ETFs. They are then taxed like a normal debt fund. Further, unlike physical gold, investors have option to either tax their long term capital gain tax either at 10% (without Indexation) or attracts tax of 20% (with Indexation). Gold ETFs sold within 1 year are classified as Short Term Capital Gains and gets added to the normal income of the person and attracts slab based taxation.

Gold Saving Mutual Funds (GSMF)

This is a new breed of mutual funds which rides upon the earlier mentioned Gold Exchange Traded Funds to provide investors the ‘Comfort’ and hassle free element to invest into Gold. In order to understand GSMF better lets first highlight a few drawbacks of a Gold ETFs:

• In order to buy Gold ETF, an order needs to be placed on a stock exchange via a stock broker. While this sounds easy, not every one has the time to place an order with the stock broker and then to make a payment against the order. Further, a brokerage needs to be paid to the stock broker which may range upto 0.75% of the value of gold and hence adding to the cost of investing.
• The human intervention to place an order each time you want to buy Gold ETF adds a physcological resistances. For example, if the gold prices are ruling at Rs. 2600 per gram, you may want to wait for the prices to come down by a couple of hundred rupees to invest into it. When it comes down to Rs. 2400, you may wonder that the prices may correct further. Finally the prices take a U turn and reach Rs. 2800 and then you wonder why didn’t you buy them at Rs. 2400 levels ! To avoid such resistances, a simple and effective investment tool called Systematic Investment Plans (SIP) are offered by mutual fund houses to invest regularly into mutual funds. For details on SIPs have a read of our article How SIPs Work.
• You need to have a Demat account in order to invest into Gold ETF – which not every investor may be holding. Opening a Demat account for investing into Gold ETF adds any where from 300 – 1000 Rs. per year to the cost of investing.
• Minimum one unit needs to be bought by an investor in case of Gold ETF which equates to 1 gram of gold. Even with the current prices, one unit costs around Rs. 2500. Investing Rs. 2,500 every month into gold is still not really affordable for the mass gentry.

Gold Saving Mutual Funds operate just like any other mutual fund which accepts investments from people. However, instead of investing the funds into Gold directly, they buy the units of a Gold ETF. When the prices of Gold goes up, the prices of Gold ETF units go up. Since GSMF invest into units of Gold ETF, the value of GSMF’s units also go up.

Like any other mutual fund, you can invest into GSMF via monthly SIPs and hence makes them the most convenient form of investing into Gold. You can invest from as little as Rs. 500 – 1000 per month into GSMF which allows you to buy even a fraction of a gram, adding to affordability. You may notice that GSMF is just a convenience wrapper around a Gold ETF.

However, GSMF face the following drawbacks :

• While GSMF provide investors exposure to Gold, it doesn’t allow investors to convert their investment into physical gold. If the investor want to covert their holdings into physical gold, the only possible option available is to sell the units of GSMF and with cash proceeds buy physical gold.
• As GSMF rides upon a Gold ETF, it adds slightly to the costs. This largely varies from one Mutual Fund house to another. The additional cost can vary from 0.25 % to 1% per year of the assets managed by the GSFM. In order to reduce the overall charges paid by an investor to invest into Gold via GSFM, most GSFM try to ride upon the Gold ETF of the same Asset Management Company. The first GSFM which came into the market was Reliance Gold Savings Fund which invests into Reliance Gold ETF. The charges applied by Gold ETF is upto 1.5% and any investments made by an investor via Reliance Gold Savings Fund are capped with an overall charge of 1.5 %. Hence an investor is not charged increased cost of fund administration to invest via Reliance Gold Savings Fund.

Tax Treatment

GSMFs are subject to the same taxation aspects as Gold ETFs.

Gold Sector Mutual Funds

Gold sector funds do not invest into Gold commodity. However, they invest into Companies which are in business of manufacturing gold, gold ornaments, etc. It is very important that this is known by investors as they often end up investing into Gold Sector Mutual funds and later realize that even if the prices of gold is going up, the value of their investment is not really following that direction.

You may be thinking that if prices of gold are going up, the gold manufacturing companies would be benefitting with this. This relationship is not always true and in some cases the manufacturing companies may be facing financial or operational difficulties which may affect their profitability. Further the general sentiments on the economic conditions of an economy would greatly influence the stock prices. Such mutual funds are not very popular in India considering that there are not many listed gold manufacturing companies in India.

Gold Deposit Scheme

Another option to invest in Gold is buying it in physical form and depositing it with a bank operating a Gold Deposit Scheme. It is quite an attractive option whereby the bank will pay you around 1% interest rate on the value of gold deposit for the duration of the deposit (upto 5 years) and after that you can get your gold back. This is also very tax efficient and capital gains from gold deposited in such scheme are considered tax free. For further details, please refer to our article Gold Deposit Scheme.

Conclusion

After going through all the available options in the market to invest in gold, it would be interesting to know what do you consider as the best available investment option. I personally like investing via Gold Saving Mutual Funds as they provide a great convenience over other available investment options – and I don’t care if I can’t convert the units of GSMF into physical gold. All I want is an exposure over gold rather than getting an option to physically see and touch my gold portfolio. You might also want to have a read of our other article Golden Path of Goldwhich discusses upon the factors affecting the gold prices.

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