How to Invest in Gold in India: A Beginner’s Guide

Since ancient times, gold has been a symbol of wealth and prosperity. Investing in gold has been one of the earliest ways of portfolio diversification. Even today, gold is considered a smart choice to hedge portfolios and for protection from market fluctuations.

Whether you are new to investing or have a well-rounded portfolio, you should consider holding about 5-10% of your total portfolio in gold. Here’s a gold investment guide, especially for beginners. This gold investment guide for beginners will cover why you should invest in gold, different ways in which you can invest in gold, gold tax rates and what you should consider while investing in gold.

Benefits of Investing in Gold:

Different people invest in gold for different reasons. For some, gold is handed down over the generations and preserving that is important. It can come in handy during marriages or be a security for the future. Others take the help of professional financial managers who advise investing in gold. In this guide to investing in gold, we outline the top reasons why you should include gold in your portfolio.     

1. Store of Value

Gold is a long-term store of value. Historically, the value of gold has only appreciated over time. Even when other assets in the market lose their value, gold has proven otherwise. Moreover, gold rates are inversely related to other asset classes, such as equities, ensuring you have a backup even if other investments tank.      

Additional Read: Gold Investment: Is It Good to Add Gold in Your Portfolio

2. Hedge Against Inflation

Investing in gold provides a hedge against inflation. Gold is one of the least volatile asset classes in the market. Its inverse correlation with other volatile asset classes, such as equity, helps maintain its value even in turbulent times.

3. High Liquidity

Since there is a significant demand for gold in the market, it is a highly liquid asset. You can sell it during emergencies and make the money you need. You will not have to wait a long time to liquidate your gold investments.

4. Doesn’t Require Specialized Knowledge

Unlike equity or bond investments, investing in gold doesn’t require deep market understanding. It is simple and easy to invest in gold. Also, the different ways in which you can invest in gold make it accessible for anyone to invest in the asset.

Different Ways to Invest in Gold

Traditionally, it was only possible to invest in physical gold in the form of bullion or jewellery. As financial markets have evolved, new ways of investing in gold have emerged. In this gold investment guide for beginners, we tell you the different ways in which you can make gold investments.

1. Physical Gold

Of course, the easiest way to invest in gold is to buy gold coins, bullion or jewellery. You can visit any gold store and buy these. However, a big disadvantage to this is the money you may lose in making charges. You will also have to find a way to store these investments safely.

2. Digital Gold

An alternative to physical gold investments is digital gold investments. Every investment you make is backed by a 24K physical gold investment. You can start your digital gold investments with as little as Rs 10!

3. Gold Sovereign Bonds

Issued by the Reserve Bank of India, Gold Sovereign Bonds are one of the best ways to invest in digital gold. Apart from the underlying asset appreciation, they also provide annual interest on your investments.

4. Gold Mutual Funds

Gold mutual funds invest in stocks of gold companies, physical gold and other gold investments. Through investments in these assets, you can diversify your gold investment.

5. Gold ETFs

Gold Exchange Traded Funds make gold investments and allow you to trade in fractions of them like equities.

Gold: A Historical Overview

In ancient Greece, gold was used as currency. Since then, the precious metal has found its place in the financial markets. The rise of the gold standard as a monetary system used fixed quantities of gold to determine the value of money. After World War II, the gold standard collapsed, and the Bretton Woods Agreement replaced it.

Today, while gold does not back currency reserves, it is still considered one of the best investments. It is inversely related to stock market performance, providing a hedge against inflation.

Tax Rates for Gold Investments 

Physical gold held for less than three years attract a short-term capital gains tax (STGC) at your income slab level. For investments held more than three years, long-term capital gains (LTGC) tax at 20% plus a 4% cess is levied.

Digital gold held for less than three years does not attract any direct tax. LTGC on digital gold is applicable at a rate of 20% plus cess and surcharge.

Key Risks of Investing in Gold

Depending on the investment option, investing gold as an asset class also entails certain risks:

1. Physical Gold: Investing in physical gold carries the risk of theft and purity issues.
2. Digital Gold: Currently, digital gold in India is issued by institutions like Augmont Gold and MMTC-PAMP. This method of gold investment lacks regulatory oversight as it is not under any regulatory body such as RBI or SEBI.
3. Gold ETFs and Mutual Funds: Potential volatility in gold prices poses a risk to these two gold investment options, since the underlying asset for both is physical gold. For example, Gold ETFs invest in physical gold or companies engaged in mining or refining gold operations. Therefore, a change in the price of gold has a direct impact on gold ETF performance. Regardless, it is to be noted that, unlike digital gold, gold ETFs and mutual funds are under the regulatory purview of SEBI.
4. Sovereign Gold Bonds: Instead of physical gold, these bonds are backed by a derivative of gold issues by the government through the RBI. Therefore, there is a risk of sovereign default. Sovereign default refers to a situation arises wherein the government cannot repay its outstanding debt.