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Gold is one of the most preferred investments by all and sundry in India. High liquidity and inflation-beating capacity are its strong selling points, not to mention beauty, prestige, and so on. Though there are phases when markets witness a fall in gold prices, it never lasts and always makes a strong comeback.

1. Why Should You Invest in Gold?

Safety, liquidity, and returns are the three criteria most conventional investors look for before making any investment. While gold meets the first two criteria swimmingly, it doesn’t perform badly at the last one either. Here is why you should invest in gold:

a. Investing in gold is worthwhile because it is an inflation-beating investment. Over a period of time, the return on gold investment has been in line with the rate of inflation.

b. Gold has an inverse relationship with equity investments. For example, if the equity markets start performing poorly, gold would perform well. Considering gold as an investment option in your investment portfolio will be a buffer to the overall volatility of your portfolio.

2. How to Invest in Gold?

The ‘Golden question’ here is – how does one invest in gold? Traditionally, it was by buying physical gold in the form of coins, bullions, artefacts, or jewellery. However, there are more advanced forms of gold investments nowadays such as Gold ETFs (exchange-traded funds) and Gold Funds.

Gold ETFs are similar to buying an equivalent sum of physical gold but without the hassles of having to store the physical gold securely. Hence, there is no risk of theft/burglary as the gold is stored in Demat (paper) form. Gold Funds involve making an investment in gold mining companies.

Let’s understand different ways of investing in Gold from the table below:

Gold

Gold ETFs (Exchange Traded Funds)

Gold Funds

Investment in physical gold

The investor buys a proportionate value of gold but not in the physical form

The investment is made in bullion and companies involved in mining gold

No need for Demat account

The investor needs a Demat account

No need for a Demat account to invest

Market fluctuations directly affect the prices of Gold

Changes in the gold prices affect that of Gold ETFs

Changes in the gold prices don’t affect Gold funds directly

No additional charges other than the physical gold itself

Gold ETFs involve asset management and brokerage fees

There’s a minimum charge to manage the gold funds.

Risks of theft and burglary associated with  storing physical gold

Gold ETFs remove the burden of trading gold in the physical form

Eliminates the risk of theft/ burglary and buffers investments to changing market fluctuations

No paperwork required for investing

Paperwork required for investing in Gold ETFs

Paperwork is required for  investing in Gold funds

Systematic Investment Plan (SIP) not available

No SIP option

 

SIP available

Best suited for conventional investors

Best suited for  investors who have the required time and skillset to trade

Best suited for investors who expect high returns taking calculated risks

3. What are Gold Funds?

Invest in gold funds and you invest in stocks of companies operating in gold and gold-related activities. Gold mutual funds also include silver, platinum, and other metals in their investment basket. A mutual fund manager on behalf of an Asset Management Company manages the gold fund, unlike gold ETFs. They utilise the fundamental trading analysis to buy and sell stocks to try to maximise returns for the investors. Returns from gold funds depend on market conditions to an extent.

Gold mutual funds eliminate the risks on returns substantially by distributing investments along with a wide range of investment domains. In other words, mutual funds work on the principle of diversifying, i.e. not putting all eggs in one basket. Investors need to weigh their risk appetite and goals before choosing such a mutual fund.

4. Gold Investment vs Mutual Funds

Particulars

Gold Investment

Mutual Fund

Definition

Gold is a precious high-value metal that is liquid in nature

Pools investors’ money in equities, debts and other market instruments to multiply the money

Management

Investments are made and managed by the investor

Experts manage the investment  professionally to create wealth and reduce risks

Risk Involved

Physical carrying and storage of gold involves high risks of theft and burglary

Investment in mutual funds can be made with safe and secure methods

Returns

Gold does not pay any dividends

Mutual funds yield substantial returns to the investor

Investment Cost

Taking an average cost of Rs.31,000 per 10 grams, one needs to carefully think before making an initial investment in gold; considering the high cost to begin investing

Mutual fund investment is affordable and flexible.  One can begin investments from Rs.1,000

Investments of any kind have their own set of pros and cons. For gold investment, the safety and security of physically protecting the gold can be risky and cumbersome. Although investing in gold comes with a bunch of disadvantages, the other viable investment option that one can consider is Mutual Funds. They are also more tax-efficient as compared to traditional investments.

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