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What's the best way to buy gold this Diwali, physical or paper?

Buying gold as ornaments makes sense only for personal use. After all, ornaments are an expensive way of buying gold.

Diwali is just around the corner and buying gold is customary. Millions will buy gold, even if it’s a small token amount in Diwali.  Gold can be bought in two ways- physical and paper. 

Physical gold

Here one can buy gold the traditional way, which is in the form of gold ornaments, or in the form of gold bars and coins.  Buying gold as ornaments makes sense only for personal use. After all, ornaments are an expensive way of buying gold. One has to pay making charges (6% and 14% on the cost of gold), safety is a concern, plus extra for renting bank lockers to store it. 

Gold coins and bars come in various denominations of 5,10,25 grams and can be bought at banks, jewellers, online etc. You will have to shell out more money if you want to buy gold which comes with the certificate of authenticity or hallmark at an extra cost, stating the purity of gold on it. The concerns here are similar to buying gold jewellry; safety, high cost, purity and the like. 

Paper Gold

Gold is available in a paper form, via the mutual fund route, as ETFs and as Sovereign Gold Bonds.

Buying/selling a gold fund is very similar to investing in any mutual fund scheme. One doesn’t need a demat account for investing. There is no risk of theft. One can invest small amounts via a Systematic Investment Plan (SIP). The gold funds don’t necessarily invest in gold directly, but depending on the type, in either companies involved in its mining or sometimes even the metal.

1. Gold Mutual Fund

Buying/selling a gold fund is very similar to investing in any mutual fund scheme. One doesn’t need a demat account for investing. There is no risk of theft. One can invest small amounts via a Systematic Investment Plan (SIP). The gold funds don’t necessarily invest in gold directly, but depending on the type, in either companies involved in its mining or sometimes even the metal.

2. Gold exchange-traded funds

Here one can buy gold in a demat form, and can be traded on the exchange. Usually, one unit of gold is equal to one gram. This can be bought in lump sum or even at regular intervals through SIP and even as one gram of gold.  

The gold is stored by the fund house and one can ask for physical redemption or take it as cash in their account like regular MF. 

3. Sovereign Gold Bond (SGBs)

These are government-backed securities denoting investment into gold. SGB is a certificate scheme in which the Reserve Bank of India (RBI) issues bonds on behalf of the Government of India. 

Bond is sold at issue price during the subscription period and is for the tenor of the eight years with an exit option after the fifth year to be exercised on the interest payment dates. The bonds bear interest at the rate of 2.50% (fixed rate) per annum on the amount of initial investment. One needs to hold it for long term and can’t do a SIP, and you also need to keep enough money to invest in a minimum of 1 gram and keep track of the subscription when it opens. 

Which is the Best way to buy? 

There are four things to look into while buying gold namely cost, purity, safety, storage, tax and returns. Buy as jewellery, only for personal consumption. From an investment point of view, Gold MF and Gold ETFs are a good choice as one can invest in small amounts regularly via SIP and there’s no lock in period. SGBs are a good choice for those who want to hold for a longer time and have enough money to invest to the equivalent of minimum 1 gram of gold when the subscription opens. 

Too much investment in gold is unwarranted. Investing in gold does help to hedge against extreme events that affect financial markets , but equity manages to maximise returns over the long term period (7 years plus). Always keep your goals first and see if an investment in gold will actually help there.


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