The best way to invest in gold

2 min read Neil Borate 07 Jul 2022, 11:12 PM IST

Amid high inflation and market volatility, many investors are turning to gold. Despite the spectacular rise and then fall of cryptocurrency, for a majority, it was gold that was always the answer to inflation. However, in the short term, gold can lag behind. Mint explains.

Amid high inflation and market volatility, many investors are turning to gold. Despite the spectacular rise and then fall of cryptocurrency, for a majority, it was gold that was always the answer to inflation. However, in the short term, gold can lag behind. Mint explains.

Why is gold a hedge against inflation?

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Inflation is ultimately the result of excess money printing. Much of today’s inflation can be traced back to an unprecedented expansion in the US Fed’s balance sheet during the pandemic. In India, RBI also loosened monetary policy during the pandemic. Since the supply of gold is finite, when a greater amount of money chases the name quantity of gold, its price rises. Before the Second World War, countries around the world had linked their currencies to their gold reserves. The Bretton Woods system continued this indirectly. However, since 1971, fiat currencies have been issued without proportionate gold backing them.

What are gold’s drawbacks?

Gold is a ‘dead’ asset. Unlike stocks, it does not channel money to businesses, and you don’t benefit when those companies grow and make profits. You do not receive any dividends on gold. You also do not get any interest on it, other than the 2.5% paid by the government on sovereign gold bonds. There are long spells in which it does not give high returns and lags the stock market and even inflation. For instance, the Nifty has delivered a CAGR of approximately 10.5% since 2010, compared to 8.2% for gold. However, the low correlation between gold and stocks makes it a good diversifier

Is it safe to buy digital gold offered by fintechs?

Over the past 5-7 years, fintechs have been offering so-called digital gold, where you buy gold through an app which is stored in the vaults of a partner company. However, it is unregulated. It faced a major setback over the past year with a Sebi clampdown. For instance, stock brokers regulated by Sebi cannot offer this product. Lack of regulation raises the risk of this product.

How do you invest in gold?

There are a number of ways in which you can invest in gold. You can buy jewellery or gold coins and bars in the physical market. You can buy units of gold Exchange Traded Funds (ETFs) or gold savings funds. You can buy sovereign gold bonds (SGBs). Each of these instruments is linked to the price of gold, but each serves a different purpose. Physical gold is good for consumption (those who want to wear jewellery), ETFs for those who want to trade in gold and SGBs for buy-and-hold investors due to the 8 year lock-in of these bonds.

What are the taxes on gold in India?

If you buy physical gold, you have to pay Goods and Services Tax (GST) of 3%. This does not apply to SGBs or ETFs. When you sell gold at a profit, you have to pay capital gains tax. This is at your slab rate if you sell within three years. If you sell after three years of purchase, you have to pay a long-term capital gains tax of 20%, and you get the benefit of indexation. The capital gains tax applies to physical gold and ETFs. However, it does not apply to the gains you make when SGBs mature at the end of eight years. These gains are tax-free.

ABOUT THE AUTHOR

Neil Borate

Neil heads the personal finance team at Mint. A former colleague called them 'money nerds' and that's what they are. They cover topics like mutual funds, taxation and retirement, all to improve your chances of building wealth. Neil graduated with a degree in law and economics. He passed the CFA Level I exam and began his writing career at Value Research, a mutual fund research firm in 2016. He joined the personal finance team Mint in 2019. Everyday, the Mint Money Team tackles personal finance questions such as where to invest and where to borrow, through articles, charts and reader queries. They also have a daily podcast - 'Why Not Mint Money' and an annual ranking of mutual funds - the Mint 20.