Different forms of Investment in Gold- Physical Gold, Sovereign Gold Bonds, and gold ETFs
Although there are many different kinds of precious metals, gold is highly valued as an investment. Gold is one of the most favoured investment options in India because of several contributing variables, including its high liquidity and ability to fight inflation.
Purchasing jewellery, coins, bars, gold exchange-traded funds, gold funds, sovereign gold bond schemes, and other items are just a few ways to invest in gold.
Although there are occasions when gold prices decline, these declines often don’t last long and invariably lead to a sharp upturn. Once you’ve decided to invest in gold, you need to carefully consider your options.
Gold Investment Plans: A Guide to Investing in Gold
Now for the most crucial section, which addresses “How to invest money in gold.” People do, however, appreciate some traditional and contemporary forms of gold investing.
In its traditional forms, it simply meant purchasing actual gold in the shape of coins, jewellery, artefacts, or billions. Today’s investors have more options than ever before, including gold funds and exchange-traded funds (ETFs).
Exchange-traded funds, or ETFs, offer a comparable experience to purchasing physical gold; the main distinction is that ETFs do not involve real gold purchases. The purchased gold is kept in demat (paper) format, so you avoid the headaches of having to store the actual gold.
Let’s take a closer look at the variations among the fundamental gold investment strategies.
- Physical Gold
- Gold ETFs (Extended Trade Funds)
- Gold Mutual Funds
- Sovereign Gold Bonds
- Digital Gold
Sovereign Gold Bonds: What Are They?
The safest option to purchase digital gold is through sovereign gold bonds, which are issued by the Reserve Bank of India on behalf of the Indian government and come with a 2.50% annual guaranteed interest rate. The bonds have a fundamental unit of 1 gram and are valued in grams of gold.
There is a maximum investment of 4 kg that can be made. These bonds have an eight-year term with an exit option that becomes available in the fifth year. Once more, it’s a hassle-free method of investing in gold because you own the metal without having any actual possessions.
A few of India’s Gold Funds
You may think about investing in the following gold funds, depending on the state of the market:
- Axis Gold Fund
- Aditya Birla Sun Life Gold fund
- Canara Robeco Gold Saving Funds
- HDFC Gold Fund
- ICICI Pru Regular Gold Saving Funds
The Risks of Gold Investing
Similar to all other forms of investment, gold carries several dangers that differ depending on the choice of investment. The principal risks connected to each of these investments are as follows:
| Type of Gold Investment | Key Risks |
| Physical Gold | Losses during manufacture, issues with purity, and theft |
| Digital Gold | Absence of oversight by regulators |
| Gold ETFs | Market risk associated with gold prices’ volatility |
| Gold Mutual Funds | Market risk associated with gold prices’ volatility |
| Sovereign Gold Bonds | The danger of India’s government going into default- although which is highly unlikely |
Since Digital Gold does not yet have a regulating agency like SEBI or RBI, there is no regulatory monitoring over it. Furthermore, Augmont Gold, MMTC-PAMP India, and SafeGold are the only three companies now ruling this industry in India, which raises the investment’s overall risk.
Market risk is a shared risk between gold mutual funds and exchange-traded funds (ETFs) because of the volatility of gold prices. This is because physical gold serves as the primary underlying asset for both products. Gold ETFs, for instance, can be used to invest in physical gold or in the stocks of businesses that mine or refine gold. As a result, changes in the price of gold affect how well gold ETFs perform. Physical gold and the equities of gold mining and refining firms serve as the underlying assets of gold mutual funds, which have a fund-of-funds structure and invest largely in gold exchange-traded funds (ETFs). Both of these financial instruments are currently governed by SEBI norms.
Because sovereign gold bonds are a derivative of gold issued by the Indian government through the Reserve Bank of India (RBI), they are not backed by actual gold, which increases the sovereign default risk associated with them. In this instance, the government creates bonds that guarantee both investment value at maturity and periodic interest payments (at 2.5% p.a.) using the price of gold as a benchmark. In this context, a sovereign default occurs when the Indian government is unable to continue making regular payments on its outstanding debt. This kind of scenario usually arises when there is a simultaneous economic slump and extremely high levels of national debt. However, there is currently very little likelihood of this occurring in India.
To ascertain whether these investment choices are affordable for investors, let’s now analyse them based on the minimal investment amount.
Minimum Requirements for Investment
Various Gold investment options have different minimum investment requirements, and these requirements are crucial in guaranteeing affordability, particularly for novice investors. The minimal investment needs for various instruments are summarised in the following table:
| Type of Gold Investment | Minimum Investment Amount |
| Physical Gold | ₹7,000 (approx. price of 1gm gold coin) |
| Gold ETF | ₹50- ₹100 (Depending on the price of one unit of ETF) |
| Sovereign Gold Bonds | ₹5,000 (approx. price of 1gm of gold) |
| Gold Mutual Funds | Starting at ₹100 |
| Digital Gold | Starting at ₹1 |
As you can see from the above table, sovereign gold bonds, Gold ETFs, and Physical gold have far larger minimum investment amounts, while digital Gold and Gold Mutual funds have the lowest entry points.
Gold Investment Options’ Liquidity
Liquidity in the context of investments usually refers to how easily they can be bought and sold.
- It is very simple to buy and sell physical gold, digital gold, gold ETFs, and gold mutual funds. They are therefore regarded as liquid investments.
- Currently, sovereign gold bonds have an eight-year maturity. That does not, however, imply that the investment must be held until maturity, without exception. You have two choices if you wish to redeem before maturity.
- After five years, or after the lock-in period has ended, you are able to prematurely pay out of the bonds. You have the choice to list and sell your sovereign gold bond on the secondary market if you decide to withdraw your investment before this five-year period ends. After six months have passed since the date of issue, this can be done whenever you like. Nevertheless, due to the secondary market’s low volume, you could have to sell your bonds for less than the going rate for gold.
- A loan secured by your bonds is an alternative if you’re seeking a way to monetize your investment without having to sell it or cash it in too soon. For instance, SBI provides loans up to 35% of the value of the bonds used as collateral against national gold bonds.
Which Documents Are Required for Gold Investing?
For the PAN Card, an investment of more than Rs. 2 lakhs in physical gold is required; however, in the case of ETFs, you must first open an account with a brokerage firm and then a Demat account with the same company. Aadhar, PAN, voter ID, or passport are among the KYC documents needed to purchase physical gold when investing in SGBs (Sovereign Gold Bonds).
Why Would Investing in Gold Be Better?
The three most crucial factors for a traditional investor are profitability, liquidity, and safety. All of these expectations should be met while investing in gold. While some investors view gold returns as exceedingly erratic, for many investors, gold serves as a haven during uncertain times. Let’s consider a few examples that demonstrate why investing in gold can be a smart move:
Returns on gold investments have consistently been shown to be consistent with inflation, regardless of the rate of inflation. To put it simply, it’s an investment that beats inflation.
Liquidity is another important feature that justifies investing in gold since it gives investors good liquidity.
Conclusion
There are advantages and disadvantages to any investment. If you are against owning actual gold, you can invest in SGBs, gold funds, or exchange-traded funds (ETFs). Gold may give you exceptional liquidity and outpace inflation, even though it is not a passive investment like stocks and bonds, that gives you regular income in the form of dividends and interest. It seems that buying gold generally has more benefits than drawbacks. In summary, investors who prioritize liquidity may choose gold ETFs and funds, while those who do not require the money right now might choose sovereign gold bonds.