Gold, which has been used as a currency, commodity, and investment for thousands of years, is popular among today’s investors as a hedge as well as a “safe haven” during times of economic turmoil. The gold market is very liquid, and investors may obtain exposure to the precious metal in a variety of methods, including physical gold (gold coins and bars) and exchange-traded funds (ETFs).
What is physical gold?
In India, gold is one of the most popular investment options. It’s a valuable asset with emotional and societal implications. Gold is purchased in India in the physical form of gold coins, bars, jewelry, and gold biscuits. The majority of the time, it is for personal use.
Gold may be bought directly from banks, jewelers, or any other merchant. There are no middlemen or contracts. As a result, there is no counterparty risk when purchasing physical gold. Gold may be readily liquidated for cash anywhere in the globe. It is a well-recognized asset that may be employed at any moment in an emergency. Though gold purchases are normally kept private, it is a good idea to save all invoices and receipts for income tax purposes.
The tax on capital gains from gold is determined by the asset’s holding duration. Assume the gold is sold before the 36-month period has passed after acquisition. The STCG is taxed at the individual’s income tax bracket rates in such circumstances. If the gold is sold within 36 months after the acquisition, long-term capital gains are taxed at 20% with indexation and 1% without indexation.
Investing in actual gold has its own set of drawbacks. Because gold biscuits come in 10 grams, the minimum investment is generally expensive. After purchasing gold, the chance of it being stolen grows. And, in order to protect it, one must invest in safety lockers. This raises the storage and transportation expenses.
Making costs for jewelry are usually on the higher end. There is no assurance of purity when buying gold. Furthermore, the price of gold fluctuates from one dealer to the next. A wealth tax is imposed on gold purchases worth more than INR 30 lakhs. Gold also has a lower resale value than a sovereign gold bond or a gold ETF.
Investing in physical gold has a number of advantages
Take physical ownership of your investment
Investors have the option of keeping their investment in tangible form. They might be in the shape of decorations, bars, or coins. As a result, it is one of the safest investments.
Inflation and currency depreciation
Gold investments may help preserve your wealth from inflation and depreciation.
Complete wealth control
Having actual gold on hand allows investors to determine when to purchase and sell. The asset is the responsibility of the investor. As a result, the investor has total control.
What are Gold Exchange Traded Funds (ETFs)?
Gold ETFs are mutual funds that invest in gold bullion and follow the price of gold. They’re backed by gold that’s 99.5 percent pure. Gold ETFs are a dematerialized version of gold that may be used as a substitute for actual gold.
Because one gramme of gold equals one unit of Gold ETF, the minimum investment is one gramme of gold. The mutual fund trades on stock markets, allowing investors to have exposure to gold while still participating in the market. Gold ETFs are traded on Indian and international platforms. As a result, ETFs may be bought and sold on exchanges like the NSE and BSE.
These ETFs may be traded using a trading and demat account. As a result, purchases and sales are made in cash rather than gold. The pricing of gold ETFs is the same across India, ensuring perfect transparency when dealing with them. The cost ratio for these funds is set at a maximum of 1%. There are also other expenditures, like brokerage and transaction fees. Investors may only redeem their Gold ETFs in gold at a few Asset Management Companies (AMCs). Assuming the investor has ETFs worth 1 kilogramme of gold or multiples thereof.
Because they trade on the stock market, gold ETFs are very liquid. There is also no chance of theft and no extra storage expenses since they are in a dematerialized shape.
Unlike actual gold, which fluctuates from dealer to dealer, ETFs are offered at consistent rates throughout India. Gold ETF returns are taxed depends on the investment’s holding duration. Capital gains are taxed at the investor’s income tax slab rates in the short term (before the completion of three years). Long-term capital gains are taxed at 20% with indexation advantage and 10% without indexation benefit in the long run (after three years).
Gold is the most valuable commodity and asset on the planet. It’s been used as a monetary standard for a long time. The demand for this golden metal has only increased in the past. Even now, gold in all of its forms is growing more desirable. Physical gold and gold ETFs are in high demand since they are the only assets that have consistently outperformed inflation. As a result, it’s an excellent inflation hedge.
Physical gold and gold ETFs each have their own set of advantages and disadvantages. Physical gold is generally recognised, but digital gold is safer. Compared to all other types of gold, it is very liquid. When it comes to trading, gold ETFs are more transparent. Physical gold, on the other hand, has no counterparty risk. As a result, before investing in one kind of gold, investors should think about their requirements and objectives. According to financial experts, gold should account for 10% to 20% of an investment portfolio. It may help diversify a portfolio while also serving as a buffer against inflation, currency risk, and market volatility.