WHAT IS THE BEST WAY TO INVEST IN GOLD?

WHAT IS THE BEST WAY TO INVEST IN GOLD? 

There are different ways of investing in Gold. You can buy Jewellery, physical gold 

or invest in Gold ETFs, Gold Funds or Gold futures. You have to choose the best 

option for you depending on your need and investment plan. 

Gold, as an asset class has clocked the highest returns in the past few years, 

compared to other asset classes. Today, investment decision in gold is not just 

determined by the prevailing price, but also by the mode of investment. Apart 

from the traditional mode of buying physical gold, there are other options like 

Gold ETFs, e-Gold, Gold Futures and Gold Mutual Funds. Let’s look at the most 

popular options: 

Physical Gold: This is the oldest and the most popular mode of investing in gold. 

Physical investment in gold is either in Jewellery or gold bars and coins. 

Jewellery: Investing in Jewellery has for long been the most accepted and 

preferred mode of buying this asset class. People generally buy Jewellery and 

ornaments if there is an impending wedding in the family or during festival seasons. 

This becomes your investment, as the value of the Jewellery appreciates when the 

gold prices increase. Cash purchases above Rs. 5 lakhs attract tax at 1% of the 

purchase amount. 

Advantages: It is the easiest mode to buy. You only need the cash to buy gold. 

Disadvantages: The biggest drawback when you buy Jewellery is that you will 

have to pay making charges in addition to the market price of gold. In some cities 

like Chennai, the jeweler also collects a certain percentage towards the wastage 

he incurs. Storage of physical gold also becomes difficult, as the chance of theft is 

high. It is important to buy Jewellery from a reputed jeweler, as it is very easy to mix 

other metals and reduce the purity. 

Gold Coins and Bars: You can buy gold in coin or bar format from any bank or 

jeweler. Available in different weights, these bars and coins can also be used at a 

later date to convert into Jewellery if needed. All bullion purchases (other than 

coins below 10 grams) will attract VAT of 1% if the value of the purchases exceeds 

Rs. 2 lakhs. 

Advantages: They are easily available at banks and Jewellery shops. As it is 

generally not meant for regular use, you can store it in your bank locker. Unlike 

Jewellery, you pay only the market price of gold and not any making or wastage 

charges. 

Disadvantages: They are generally sold at a premium to the market price. When 

you want to sell them, you will again have to incur a loss, as it is generally bought in 

the market at a get a slight discount to the market price. You cannot sell the gold 

coins back to the banks, as banks do not buy back the gold coins sold. So your 

selling options are limited to that extent. 

Gold ETFs: A gold ETF is akin to buying physical gold online and storing it in your 

Demat account. You will need to have a Demat account to purchase Gold ETFs. 

There are several Gold ETFs in the market today, and prices are usually 

benchmarked to the London gold price. Short term Capital Gains (STCG) tax is 

applicable if you sell your Gold ETF units in less than 12 months. Long Term Capital 

Gains (LTCG) tax of 10% without indexation or 20% with indexation, whichever is 

lower is payable, if you hold these units for over 12 months. 

Advantages: You need not worry about the purity, storage and safety of your 

investments. You can buy in small quantities - as low as 1 0.5 gram of gold. This is a 

liquid form of investment, as you can sell the Gold ETF and realize the proceeds 

within 2 working days. The good part is when you are selling the Gold ETF; you get 

the standard market rate that everyone gets. So there is a price transparency 

here. Gold ETFs do not attract wealth tax. 

Disadvantages: As in the case of any other stock market investment, you will need 

to pay brokerage charges to your broker when you purchase Gold ETFs. You need 

to have a Demat account to start purchasing Gold ETFs. 

E-Gold: It is an online mode of investment in gold. Started by the National Spot 

Exchange Limited (NSEL) in March 2010, E-Gold units can be bought and sold 

through this exchange. Although E-Gold is similar to Gold ETFs in many ways, the 

main difference is that you can convert your E-Gold units (1 unit is equal to 1 gram) 

to physical gold at a later date. The NSEL has designated delivery centers in Delhi, 

Mumbai and Ahmedabad, where the investor can take delivery of the physical 

gold in different denominations. If you wish to invest in E-Gold, you must open a 

Demat account with one of the members of NSEL As regards taxation, STCG tax is 

levied if the E-Gold units are sold before 36 months. If held for over 36 months, E-

Gold attracts LTCG tax of 20% after indexation. On conversion to physical gold, 

you will have to pay VAT at 1% as well as other local taxes, if applicable. The E-

Gold units you hold are considered while calculating your wealth and wealth tax 

of 1% is applicable if the net wealth exceeds Rs. 30 lakhs. 

Advantages: e-Gold investors need not worry about the storage and purity of 

gold. The E-Gold units can either be converted to physical gold or can be sold as 

E-Gold units. 

Disadvantages: E-Gold investments require the opening of a Demat account 

specified by NSEL. If your existing broker is not in the list, then you must open a 

Demat account with a new broker in your vicinity. The value of E-Gold is included 

in taxable wealth. 

Daily investment in Gold: This scheme was introduced by Reliance Money and is 

called My Gold Plan. In this scheme, you set aside a fixed amount every month 

(minimum initial subscription amount of Rs. 1000 and multiples of Rs. 100 thereafter) 

for a tenure ranging from 1 to 15 years. This amount is then split into equal parts 

and gold grams are purchased over 20 working days of the month. You can thus 

benefit from the daily rupee averaging of the price of gold. A low price gives you 

more gold grams and vice versa. The accumulated gold grams should be 

converted into gold coins or Jewellery at the end of the tenure (called fulfilment). 

On fulfilment, the investor is required to pay VAT and local taxes, if applicable. 

Advantages: This method is useful to accumulate gold in small quantities at 

periodic intervals. You can efficiently keep track of the gold grams you own, as 

statements are regularly available. You need not worry about the purity and 

storage issues as well. The scheme is flexible as you can convert your accumulated 

gold into gold coins or Jewellery. 

Disadvantages: Administration charges are very high at 1.5%, i.e.: the daily gold 

price is marked up by 1.5% before making the investment. If the delivery of coins or 

Jewellery is not taken during the validity period, the customer needs to pay 

storage cost of 0.5% per annum till he takes delivery. At the time of fulfilment, taxes 

and coin making charges also need to be paid. 

Gold Savings Schemes: Jewelers offer these schemes across the country, wherein 

customer is required to pay instalments for a specified period. At the end of the 

period, the Jeweler also contributes cash, and you can purchase ornaments with 

the accumulated balance in your account. As an e.g. Tanishq runs a scheme 

where you pay 11 instalments, and the Jeweler pays the 12th instalment. You can 

buy Jewellery from Tanishq for the value accumulated at the end of this period, 

based on the market price on the date of purchase. 

Advantages: This scheme helps you to save regularly to plan for your investment in 

gold. 

Disadvantages: You are forced to purchase gold at the prevailing market price. If 

the price of gold has increased over the period of your investment, you lose. 

Usually you also pay making charges for the Jewellery, which can be very high. In 

short, you are forced to agree to the seller’s terms, and this may not be the best 

mode of investing in gold. 

Apart from the above modes, you can also invest in (a) Gold Saving Funds, which 

is a mutual fund which invests in gold companies and (b) Gold Futures (ideal for 

getting short term gains by trading, rather than for investment). 

A comparison table is presented below, for your quick reference. 

Details	Physical Gold Jewellery	Physical Gold Coins & bars	Gold ETF’s	E-Gold	Daily Investment Plan	Gold Savings Schemes
Demat Pre-requisite	N.A.	N.A.	Any Demat Account	Demat account with broker specified by NSEL	N.A.	N.A
Purchase Price	Market Price - may differ from one player to another	Premium to market price	Benchmarked to London Gold price; slight variations between different funds due to trading	Price quoted on NSEL	Daily price	Conversion to physical gold based on the prevailing market price on the date of purchase
Other charges	Making charges	N.A.	Brokerage charges	DP charges, annual maintenance charges and transaction costs. Taxes to be paid on conversion to physical gold.	1.5% markup on the daily price of gold; extra taxes and coin making charges on fulfillment.	Making charges at the time of purchase of Jewellery.
Storage cost	High	Moderate	Nil	60 paise per e-Gold unit per month	Applicable if fulfillment not exercised on time	Nil during the period of investment; Post purchase, same as storage costs of Jewellery.
Lock in	N.A.	N.A.	Some funds charge exit	Details not available	6 months	N.A

Details	Physical Gold Jewellery	Physical Gold Coins & bars	Gold ETF’s	E-Gold	Daily Investment Plan	Gold Savings Schemes
load if sold within 6 months
Sale	Sale to Jeweler	Sale to Jeweler	Sold on the exchange	Sold on the exchange or converted to physical gold	To be converted to physical gold on maturity of the tenure	N.A.
Purity	Depends on the source of purchase	Depends on the source of purchase	Purity of underlying gold at 99.5% fineness(24 karat)	995 purity(24 karat);purity not guaranteed by London Bullion Market Association	24 karat gold of 995 fineness	Depends on the source of purchase
Conversion to physical gold	N.A.	N.A.	Very few funds allow this	Possible	Possible	Possible
Taxation	1% tax collected at source for cash purchases above Rs 5 lakh	1% tax collected at source for coins below 10 grams; Other bullion times:1% Tax collected at source for cash purchases above Rs 2 lakh	STCG tax if held for less than 36 months; LTCG tax if held for more than a year(LTCG of 10% without indexation)	STCG tax if held for less than 36 months; LTCG tax if held for more than 36 months(LTCG of 20% with indexation); included in computation of Wealth Tax to be paid each year; 1% VAT if converted to Gold	VAT/Sales tax on fulfillment	Tax to be paid on purchase of Jewellery

Which is the best option to invest in gold? 

It depends on your need and time horizon. Buying Gold Jewellery is suitable only 

when you need it for a function or marriage. If you wish to hold gold as an asset 

class, purely from an investment perspective, it is best to opt for Gold ETFs or E-Gold 

units. Financial planners normally recommend not investing more than 5% to 10% 

of your total assets in Gold. 

Happy Investing

Source:Gettingyourich.com