5 things to keep in mind while investing in gold

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October 19, 2020 2:22 PM

Gold, the ultimate symbol of prosperity and wealth, has always been the most favourite asset class for investors for a variety of reasons. However, should you just buy it?

From an investment perspective, it’s always better to limit your gold investments to 5-10% of your overall portfolio’s value.

Gold, the ultimate symbol of prosperity and wealth, has always been the most favourite asset class for investors for a variety of reasons. People buy and invest in gold irrespective of age and income. Gold becomes more attractive in times of any crisis or pandemic as it is considered the safest asset class and one of the best hedging tools against inflation.

Whatever be the reason for the yellow metal’s growing popularity among investors, just buying or investing in gold without taking other factors into consideration makes little sense. For, one may get duped – particularly in case of buying gold jewellery — or may end of buying gold at inflated prices, or there may be some purity issue.

Therefore, it is in your own interest to exercise some caution while purchasing gold. Here we are taking a look at 5 things which you should keep in mind while investing in the yellow metal.

1. Invest in Digital Gold

Notwithstanding the traditional consumption-oriented requirements to invest in gold, it’s always better to do so in digital forms than making physical purchases, especially in these times of a worldwide pandemic. “Digital gold investments are free of purity and storage concerns unlike physical gold investments and hence could generate higher return on investments apart from being much safer as they eliminate the risk of contracting and spreading the feared virus that may arise while dealing with physical gold. Physical gold investments might also involve making charges and GST on making charges which might eat into the actual returns,” says Adhil Shetty, CEO, BankBazaar.com.

2. Invest in Sovereign Gold Bonds

As far as digital gold investments are concerned, it might be a better idea to invest in the RBI-backed Sovereign Gold Bonds than gold mutual funds and gold ETFs because the former gives a 2.5% p.a. return over and above the actual price of gold on the day of sale of these bonds – things that may translate to higher actual results. SGBs are also more tax-efficient as there is no capital gains tax upon redemption while the interest income is taxed according to the provisions of the I-T Act. Purchasing SGBs online during the issuance periods often attracts an additional discount too while they could be purchased throughout the year from the secondary markets. The only point of consideration could be the fact that SGBs involve a maturity period of eight years while these bonds could be liquidated after the fifth year onwards, subject to certain terms and conditions.

3. Gold Mutual Funds Vs Gold ETFs

Now if you’re unsure about investing in gold mutual funds or gold exchange-traded funds (ETFs), you need to know that you might earn a slightly higher return through the latter primarily owing to their low cost of investment. However, before ruling out gold mutual funds because of their higher expense ratio and even exit loads, it’s critical to understand that it’s much easier to invest in them compared to gold ETFs.

“That is because investing in gold ETFs requires a demat account which is not the case with gold mutual funds. Also, gold mutual funds allow SIP investments usually starting at Rs 1000 while investors must purchase a minimum of 1 gram of gold while investing in gold ETFs. Do note that the long-term capital gains on gold (when held for more than 3 years) is taxed at 20% with indexation benefit (plus surcharge and cess, if any) while short-term capital gains are taxed according to the investor’s applicable slab rate,” informs Shetty.

4. Limit your Gold Investments

Despite the recent hike in gold prices, it’s still a fact that the prices of gold tend to flatline over long periods of time. As such, from an investment perspective, it’s always better to limit your gold investments to 5-10% of your overall portfolio’s value to ensure you meet your financial goals in time with the help of a diversified investment strategy.

5. Check purity, hallmarking

If you are planning to buy physical gold, gold jewellery, etc, then you should take some precautions as well.

“With global economic uncertainty still looming large and rising geopolitical concerns, gold is likely to continue to glitter. However, buying gold from little-known and unbranded jewellers can cost you dearly as you can never be sure of the purity of jewellery being sold by them. So, purity of gold, making charges, Hallmarked jewellery etc are other considerations while buying gold in physical form,” says M Manuvel, Chairman & Managing Director, Manuvel Malabar Jewellers.

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