Investing in gold can be a smart way to make your finances more secure, but how do you buy it safely without getting tricked? Find out in this article.
The Context
We have gold because we cannot trust governments — Herbert Hoover
Personal opinions may differ, but in our earlier post, we did try to provide a compelling argument for buying gold. This article will give you a good idea of how to invest in gold.
How Do You Buy Gold?
Buying anything wholesale always results in lower prices, but according to the law, bulk purchases of gold are only permitted to jewelers and wealthy businessmen. Retail investors must adhere to house rules established by the Central Board of Direct Taxes, which state that:
💬 A woman who is married is permitted to own up to 500 grams of gold jewelry;
💬 A single woman can carry up to 250 grams, and
💬 The maximum amount of gold jewelry and ornaments that a male family member may possess is only 100 grams.
Additionally, before they may buy an asset, retailers must deal with other obstacles. The more valuable and regulated the asset, the longer the trail of agents and hustlers trying to steal a piece of your pie before it gets to you.
Increased fees, commissions, and other interests, either diminish an asset’s value or lower its prospective return. Let us try to explain the purchasing procedure for worthwhile gold investment so that you can develop your consensus.
There are four investment-friendly methods for purchasing gold.
- Buying Physical Gold (Gold bullion)
- Gold ETFs (Exchange Traded Funds)
- Gold Mutual Funds
- Sovereign Gold Bonds issued by the Government
1. Buying Physical Gold
You can purchase gold in its actual form if you are one of those people who must have their phone close to them at all times. “Gold Bullion” is another name for investment-class gold.
When purchasing it physically, it’s important to be sure you’re purchasing investment-grade metal rather than ornate jewelry. Additionally, your purchase ought to bear official purity markings.
Hallmarking signifies that assay facilities certified by the Bureau of Standards are ensuring the purity of the gold for you. On the website of the Bureau of Indian Standards, go here to view a list of all hallmark assay facilities.
The physical form of investment gold typically comes in different weights, such as 5 grams, 8 grams, or 10 grams. The BIS mark, purity in carats, the name of the assaying center, and the jeweler’s identification mark are important details to confirm about hallmarking.
Three different types of purified gold in terms of a carat. The equivalent carat types are 22K916 for 22 carats, 18K750 for 18 carats, and 14K585 for 14 carats.
You can simply enter a bank with your PAN card and purchase the desired denominations if you are unsure of the fundamentals of your jeweler. Do keep in mind that after you purchase physical gold, you must protect it against theft and intruders like a ninja.
As an alternative, if you elect to store it in a bank locker, you will incur a storage fee that can reduce your overall profits. Additionally, there will be an annual wealth tax if you own gold valued at ₹30 lacs.
Please check more details with your financial advisor if you fall into this category.
2. Gold ETFs (Exchange-Traded Funds)
To invest in this one, you need to have a Demat account.
An exchange-traded fund (ETF) that tracks the domestic physical gold price is known as a gold ETF. They are passive investment tools that invest in gold bullion and are based on exchange-listed gold prices.
As an example, 0.01gm of 99.5 percent pure gold is equal to one unit of the Nippon India Gold BeEs ETF. In a nutshell, Gold ETFs are securities that express gold, whether it be in the form of paper or a dematerialized (Demat) security. Although there is no wealth tax in India, LTCG and STCG tax laws will still apply.
The gold ETF’s liquidity and lack of the need for ninja-like security are two positives in our opinion.
3. Gold Mutual Funds
These vehicles, which invest in several types of gold, are similar to traditional mutual funds. Physical gold or stocks of gold mining businesses are both acceptable forms of it. Investors have the convenience of purchasing pure gold as well, thanks to some specific gold funds that invest in actual gold.
They do levy a management fee in the form of an expense ratio, and funds with low expense ratios frequently impose exit loads as well to secure your commitment for a predetermined number of days.
For this one, you won’t need a Demat, but you will need to be KYC-compliant to invest.
LTCG and STCG tax regulations are applicable, much like ETFs.
4. Sovereign Gold Bonds
Sovereign Gold Bonds (SGB) are government securities with a minimum unit of 1 gram and a maximum unit of 500 grams of gold. These bonds are long-term investments with a minimum lock-in period of 8 years and a 5-year window for an early exit. They are periodically released by the government in units known as tranches.
These bonds, which are regarded as safe, are issued by the Reserve Bank on behalf of the Government of India. SGB also offers an annual interest rate of 2.5 percent, which is payable semi-annually on the nominal value, as compensation for your long-term commitment.
After five years have passed since the date of issuance, these bonds may be redeemed or cashed early. They may also, with proper documentation, be transferred to another eligible investor or given as a gift before maturity.
When a bond matures, capital gains are not taxed; however, if the bond is redeemed early, capital gains are taxed after taking any applicable indexation benefits into account.
5. Gold Futures (Bonus)
Some people also view commodities trading in the context of Gold Futures as an investment strategy. According to our investment philosophy, this is a highly skilled and calculated form of speculation that carries a high level of risk.
Hence we strongly discourage long-term investors from taking this route for investing in gold.
Conclusion
It’s up to you which investment technique you use when you invest in Gold.
But before investing any money, it is advised to conduct your research on the accessibility, liquidity, purity, logistical & transaction expenses, and portfolio exposure of gold if you intend to use it as an asset.
We appreciate you reading through this post.
Frequently Asked Questions (FAQs)
1. How can I buy gold safely as a retail investor?
Retail investors can purchase gold through various methods, including physical gold, gold ETFs (Exchange Traded Funds), gold mutual funds, and sovereign gold bonds issued by the government. Each method has its considerations and requirements, so it’s essential to research and understand them before making a purchase.
2. What are the considerations for purchasing physical gold?
When buying physical gold, it’s crucial to ensure that you’re purchasing investment-grade metal rather than ornate jewelry. Look for official purity markings and hallmarking, which certify the purity of the gold. Additionally, consider storage options and associated costs, such as bank locker fees and wealth tax implications.
3. How do gold ETFs work, and what are their advantages?
Gold ETFs are passive investment tools that track the domestic physical gold price. They are traded on stock exchanges like stocks and provide investors with exposure to gold without the need for physical storage. Gold ETFs offer liquidity and convenience, making them an attractive option for some investors.
4. What are gold mutual funds, and how do they differ from gold ETFs?
Gold mutual funds invest in various types of gold, including physical gold or stocks of gold mining companies. They are similar to traditional mutual funds but may impose management fees and exit loads. Unlike ETFs, investors do not need a Demat account to invest in gold mutual funds.
5. What are Sovereign Gold Bonds, and how do they work?
Sovereign Gold Bonds (SGBs) are government securities issued by the Reserve Bank on behalf of the Government of India. They allow investors to purchase gold in the form of bonds with a minimum unit of 1 gram and a maximum unit of 500 grams. SGBs offer an annual interest rate and have a minimum lock-in period, providing a safe and long-term investment option for gold.
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