If you are planning to invest in gold, it is sensible to check your options and opt for the one that suits your investment needs. (Image: Freepik)
Indian households often hold gold as an asset class, passing it down from one generation to another as a symbol of wealth and heritage in India. There are many stories relating to gold and people love this metal as a jewellery more than just an asset.
When it comes to investing in gold, it has long been a popular choice for investors looking to diversify their portfolios and hedge against uncertainties. Where gold holds cultural and financial significance, individuals often consider investing in physical gold or gold mutual funds. Both options have their pros and cons, and understanding the differences between the two can help investors make informed decisions based on their financial goals and risk tolerance.
Physical Gold
Investing in physical gold involves purchasing gold in the form of jewellery, coins, or bars. Here are some key points to consider:
* Tangible Asset and Liquidity
One of the main attractions of physical gold is its tangibility. Investors have direct ownership of the metal, which they can hold, store, and use as desired. Also, gold jewellery and coins can be easily sold or pledged for loans in India. However, the liquidity may vary based on factors such as purity, design, and prevailing market conditions.
* Storage Safety and Purity
Storing physical gold requires safekeeping measures to prevent theft or damage. Many investors opt for bank lockers or secure home safes, incurring additional costs. Ensuring the purity of physical gold is crucial, especially when buying jewellery or coins. Investors must purchase from reputable sources to avoid counterfeit or low-quality products.
* Price Transparency
The price of physical gold includes making charges, wastage, and taxes, which can vary across sellers. Buyers should compare prices and understand the total cost before making a purchase.
Gold Mutual Funds
Gold mutual funds, also known as gold exchange-traded funds (ETFs) or gold funds, offer a convenient way to invest in gold without owning physical metal. Here are the key aspects to consider:
* Investment Structure
Gold mutual funds invest in physical gold bullion and are managed by fund managers. Investors buy units of the fund, representing their ownership of the underlying gold assets.
* Diversification
Gold funds provide diversification benefits as they invest in a basket of gold assets. This reduces the risk associated with holding a single physical gold item.
* Liquidity and Transparency
Gold mutual fund units can be bought and sold on stock exchanges like any other mutual fund or stock, providing liquidity and price transparency.
* Cost Efficiency and Management
Compared to physical gold, gold mutual funds typically have lower transaction costs and eliminate the need for storage and insurance expenses. Fund managers monitor market trends and make investment decisions on behalf of investors, aiming to optimize returns over time.
What Is the Right Option?
When deciding between physical gold and gold mutual funds, investors should consider the following:
1. Long-Term vs. Short-Term: Investors with a long-term horizon seeking capital appreciation and portfolio diversification may prefer gold mutual funds. Those looking for immediate possession or cultural significance may opt for physical gold.
2. Liquidity Needs: If liquidity and ease of buying/selling are priorities, gold mutual funds offer more convenience than physical gold.
3. Cost Considerations: Compare the total costs involved in owning physical gold (including making charges, storage, and insurance) with the expense ratios and transaction fees of gold mutual funds.
4. Tax Implications: Understand the tax implications of gains from physical gold (such as capital gains tax) versus gains from gold mutual funds (subject to capital gains tax rules for mutual funds).
Adhil Shetty, CEO, Bankbazaar.com ,says, “Both physical gold and gold mutual funds offer unique advantages and considerations for investors. While physical gold provides tangibility and cultural value, gold mutual funds offer convenience, diversification, and professional management. As an investment option, you can buy and sell gold mutual funds anytime, anywhere online. It provides investors with exposure to gold as an asset class without the hassles of owning physical gold. It ensures transparency, authenticity, and purity of gold, reducing the risk of impure products.”
If you are planning to invest in gold, it is sensible to check your options and opt for the one that suits your investment needs. Gold in physical form is not a bad choice, but investing in digital gold through mutual funds helps you diversify and may offer higher returns and easy access to liquidity when needed.
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