In India, gold is one of the most popular investments. Its strong selling points are high liquidity and inflation-beating capacity, not to mention charm, prestige, and so on. When the markets are volatile, gold prices rise. Though there are times when gold prices fall, they do not last long and always make a strong comeback. In this article, we will tell you about different gold investment options in India and the associated risks with each of them.
Why Should You Invest In Gold?
Most risk-averse investors look for three criteria before investing: safety, liquidity, and returns. While gold meets the first two criteria without a hitch, it also does not perform poorly in the third. Here are some reasons why you should invest in gold:
- Investing in gold is advantageous because it outperforms inflation. The return on gold investment has historically tracked the rate of inflation.
- Gold is inversely related to equity investments. For example, if the equity markets begin to fall, gold will perform well. Including gold as an investment option in your portfolio will act as a buffer against overall portfolio volatility.
Gold Investment Opportunities in India
You can invest in gold in either its physical or digital form. Gold can be held in physical form as an investment in the form of jewellery, coins, bars (bullion), and so on. However, there are a few significant drawbacks to investing in physical gold:
- Making/designing fees increase the cost of the purchase.
- Storage costs apply due to security and insurance requirements.
- Selling is inconvenient because of potential impurities and the need for origination and purity certificates.
To get around the limitations of physical gold, you can go digital with investments like Digital Gold, Gold ETFs, Gold Mutual Funds, and Sovereign Gold Bonds. Each of these investment options is briefly described below:
Digital gold: Itcan be purchased in denominations ranging from 1 gram and up through various apps.
Gold ETFs: Gold Exchange Traded Funds are traded on stock exchanges like shares, and their primary underlying assets are physical gold and stocks of gold mining/refining companies. Investing in gold ETFs requires a Demat (Dematerialised) Account.
Gold Mutual Funds: These are mutual funds that are managed by various asset management companies (AMCs) and primarily invest in Gold ETFs. The ETMONEY App allows you to invest in the majority of Gold Mutual Funds.
Sovereign Gold Bonds: The Reserve Bank of India (RBI) issues these bonds on a regular basis, and they are available for purchase through leading public and private sector banks. While returns are pegged to the price of gold and guaranteed by the GOI, physical gold is not an underlying asset.
Keep in mind that, while the performance of all of the above gold investment examples is linked to the price of gold, there are significant differences in terms of risk, returns, availability, liquidity, lock-in period, and taxation. Let’s go over each of these aspects of gold investment options in detail, beginning with risk.
The Most Important Risks of Investing in Gold
Gold, like any other type of investment, is subject to a variety of risks that vary depending on the investment option. The key risks associated with each of these investments are listed below.
- Because Digital Gold does not yet have a regulatory body such as SEBI or RBI, it lacks regulatory oversight. Furthermore, only three companies currently dominate this market in India: Augmont Gold, MMTC-PAMP India, and SafeGold, raising the overall risk of the investment.
- Market risk is shared by gold ETFs and gold mutual funds due to the potential volatility of gold prices. This is because the underlying asset in both instruments is primarily Physical Gold. Gold ETFs, for example, invest in either physical gold or stocks of gold mining/refining companies. Thus, changes in the price of gold have an effect on the performance of gold ETFs.
- Gold Mutual Funds have a Fund of Fund structure and primarily invest in Gold ETFs, making physical gold and stocks of gold mining/refining companies the underlying asset for these schemes. Both of these financial products are currently governed by SEBI guidelines.
- Sovereign Gold Bonds are subject to sovereign default risk because they are not backed by physical gold and are instead a derivative of gold issued by the Government of India through the Reserve Bank of India (RBI). In this case, the government uses the gold price as a benchmark and issues bonds that guarantee periodic interest payments (at 2.5% per year) as well as investment value at maturity. In this case, a sovereign default occurs when the Government of India is unable to make scheduled repayments on its outstanding debt. This situation typically occurs when a country’s debt levels are extremely high and the country is experiencing an economic downturn. However, there is currently very little chance of this happening in India.