How to invest in Gold in this post today? There are two types of people who buy gold. A consumer buys gold in the form of jewelry either for use today or for use in the future. Or they want to buy gold now for a future wedding. Because they think the price is good today and the price will increase in the future, they want to buy gold now. There are other types of people who invest like investing in gold. How should we invest in gold? How does it compare to stocks and how much gold should we keep in our portfolio?
When we buy physical gold, it has some disadvantages and some risks are also associated with it. For example, when you buy physical gold, 20% to 25% goes into designing and altering it. There is also a danger of storage, if you keep gold at home then the risk will remain. If you keep gold in the bank, then you have to pay the charges for it.
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Risk Impurity Physical gold is made in 22 karats or less. Also, you have to pay GST. Along with this, there is also a price risk, the price may increase in the coming times. Because we want to lock in the price today, we buy gold jewelry. Many go to jewelers and deposit money monthly. So that when their lump sum amount is deposited, they can buy jewelry. And how to get profit in this.
invest in Gold stocks and mutual funds
Suppose you buy one unit today, or you buy 1 gram of gold today for Rs.4800. In the future it will become ₹6000 after 7-8 years. You made a profit of ₹1200 per gram. Apart from this, you also get interested at the rate of 2.5 percent per annum. This is a simple interest calculation that you get every year. But along with this, there are many other advantages of the sovereign in gold bonds.
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We will talk about 10 such advantages that make it a very unique product. If we look at it from a risk-reward perspective. You hardly get to see all these benefits together in any other product, whether we talk about Gold, ETFs, Mutual Funds, or Stocks and Mutual Funds.
ETFs, Mutual Funds, or Stocks and Mutual Funds
- Its first advantage is that you do not have to pay for a design or make any changes. Like when you come out of the showroom in physical gold, your money gets reduced by 20-25%.
- Second, there is no risk or cost of storage here. Like in physical gold you have to bear a lot of loss for its storage, there is no such risk in this.
- Third, it does not contain impurities. Like in physical gold you have to invest in 22 carats or less but here you are investing in 24-carat gold and there is no risk that the jeweler will give you 18-carat gold by saying 22-carat gold.
- And fourth, there is no default or security risk because it has the backing of the Indian government.
- Fifth, GST and STT are also not applicable. Hence no tax will be levied. If you buy physical gold, GST is applicable there. A security transaction tax is imposed if you buy stock. Hence no such transaction tax is levied.
- And sixth, capital gains tax is also not applicable to it.
Invest in Gold- ETFs, Mutual Funds, or Stocks and Mutual Funds
Its maturity period is 8 years, but after 5 years you can sell it anytime. In 5 years, 6 years, 7 years, or 8 years. If you sell it anytime after 5 years then capital gain tax will not be applicable. But if you look at other investments, either gold ETFs or gold mutual funds, stocks and general mutual funds are all subject to capital gains tax.
What is Capital Gain Tax?
Let us understand a little better what is capital gains tax. If we sell an investment within 3 years, a short-term capital gain tax is levied. So whatever profit you earn from that investment gets added to your income. And tax is levied as per your tax slab. If you sell it after 3 years, long-term capital gains tax is levied which is 20% + tax. But you get an indexation benefit for computing it.
That is, you deduct inflation from your profit. We deduct the inflation that is then subject to capital gains tax on our profits that arise.
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If you sell the Sovereign Gold Bond after 5 years, you will not be liable for any capital gains tax. This is a big advantage but here you should take care of one thing. Your capital appreciation means the price of gold is increasing. There is no capital gain tax on it but the interest you are getting is taxable. That interest gets added to your income and you have to pay tax on it as per your tax slab.
- Its seventh advantage is that you can also take a loan on it.
sovereign gold bond loan
Just like you take a loan against the pledge of physical gold, you can also take a loan against the pledge of sovereign gold bonds, which can be kept as collateral.
Just like you take a loan against the pledge of physical gold, you can also take a loan against the pledge of sovereign gold bonds, which can be kept as collateral.
The eighth advantage is that if we look at the return compared to the risk. Then they are considered very good. Because capital is appreciated here. Also, the 2.5% interest you are getting makes its returns even better.
Its ninth advantage is that you can keep it in Demat form as well. Since there is a risk of losing physical certificates. We can even put it online. In dematerialized form in the Demat account and how can we buy it in the Demat account? We will see that soon its tenth advantage will be that it can also be traded on the exchange. If you want to sell it before 5 years then you can sell it. We talked about the benefits.
How Sovereign Gold Bond Works | invest in Gold
Let us now understand how Sovereign Gold Bond works. As we talked about earlier, the minimum investment here is 1 gram. And the maximum per capita investment is 4 grams. Its issue is currently open. You can invest from 6th July to 10th July. And incidentally, if you do not have a Demat account. Or if there is any other problem then you can invest in it in August also.
So this year for example RBI released 6 series. The sixth series came in August. Every year RBI establishes 5 to 6 series. You can invest when, but if you have to invest in between, how will you invest?
how will you invest?
We talk about that too. Now let’s talk about the benefits. Every investment also has some limitations. So let’s also talk about its limitations. The first limitation is that your money gets locked in for at least 5 years. You can withdraw it only after 5 years but it is not a huge limitation as it is tradable on exchanges so if you want you can sell it before 5 years also. But here comes another limitation.
That if you sell before 5 years then you are liable for capital gains tax. The third limitation is that here you do not get the option of SIP. Many people have the habit of thinking that they keep investing some money every month. If some people invest in gold, they deposit some money with the jeweler every month. SIP is also an option in mutual funds. So you don’t get that option here. But we can deal with that to some extent.
4 ways to invest in Sovereign Gold Bonds
How can we deal with this? We have 4 ways to invest in Sovereign Gold Bonds.
- First, we can do it through the bank,
- Second, you can do it by going to the post office.
- Third, you can apply by visiting the website of Stock Holding Corporation of India Limited.
- And fourthly, we can also do it directly through your stockbroker.
If we get the option and if we already have a Demat Account. If you invest in a bank or post office, it becomes an offline process. And it also has some hassles. Because you have to go there and fill out the form, you have to do your KYC. And the investment proof you will get will be in physical certificate form. If you want to sell it before 5 years then it will be a bit difficult for you.
We should give priority to keeping our investments in Demat form. There is no risk of losing the certificate. And they’re tradable on the exchange so you can sell them whenever you want. So the best option is if you already have a Demat account. Then apply through your stock broker. It is very easy to apply. This is a single-step process. This option was not available in UPSTOX so how can I apply in Zerodha? And incidentally, if you do not have a Demat account then you can open your Demat account.
invest in Gold with Zerodha Demat account
To apply through Zerodha, if you type on google gold Zerodha, you will get the link for gold bond Zerodha, click on that. After coming down, we have to click on Login with Kite. You have to enter your username and password in it. And you will be able to log in with Kite only if your Demat account is already open. After this, we click on Authorized, In Authorized Gold Bond. After this, you will get the option to buy Sovereign Gold Bond. Here the online price is showing Rs 4802 per unit as there is a discount of Rs 50. And here we can put any quantity. Now say I enter 5 properties.
First of all, I should have ₹ 24000 in my account. After this, the order has to be placed. Hence the order is accepted. A very easy way, and we can also delete and edit the order if we want. If we want to buy Sovereign Gold Bonds in the secondary market. So we can buy through our Demat account with whatever stockbroker you have your account with. Let’s see in Zerodha, I will go to the watch list and type SGB. I have seen a lot of options with different maturities.
For example, the Sovereign Gold Bond expires on 24 August. How much Gold is available to us here? It is a bit expensive here, the price is running 4874. Why would I buy it here for so much as I am getting it there for 4802? Let’s get down to other options, can we get this a little cheaper? On 27th August we are getting 4850. And look down, let’s look at April 28th, it’s 4790. Can apply, so to apply here you go to buy, so like we buy stock.
Here also we can place a limit order and also a market order and here in the limit order, I can set my price. If I find a seller at my price the order will be executed. Let’s say I have to place an order because I want to take delivery of it. I’ll go to CNC and 4795. I entered the price here. This is a limited order and I have placed it on regular as well. And here we will click on Buy. To see that the order has been placed then we go through the orders and check it.
invest in gold stocks strategies
We have gone through all the ways to invest in Sovereign Gold Bonds. Now let’s talk about our strategies. Similarly, we can reduce or eliminate our risk. First of all let us talk as a consumer, suppose you as a consumer want to buy gold for future use. There we can have a loss in it, as earlier we talked about the problems of Impurities and Storage. That’s a different matter, but let’s say you design and make changes today and seven or eight years later you use it. So either you will polish it and it will cost and the design may be out of date. If you have a new design, you need to pay the cost of the new design. And you are not getting any interest on this money.
So what can you do? Buy Sovereign Gold Bonds for the amount you want to invest in that jewelry today. And whenever you need it after seven-eight years, by selling that sovereign gold bond at the same price because it is linked to the price of gold. If the price of gold increases say today it is 4800 and later it becomes 6000 per gram, then you also have an advantage that you can buy gold for 6000 by selling sovereign gold bonds. If its price is less then it becomes 4000. Even then the price of a Sovereign Gold Bond will be 4000 grams. Still, you can buy and sell gold, so here we are getting two advantages.
Benefits of Investing in Sovereign Gold Bonds
First, we don’t have to pay twice for design and modification. You can buy the latest designs at the time when you need them. And secondly, you are getting interested in this entire investment. And because in this case the value of your investment is linked to gold only. Even if the price turns out to be plus-minus, it doesn’t make much difference.
Because in future only you have to buy gold. But suppose you invest this money in stocks and at that time if the stock market declines. You have to bear the loss, if you sell and buy gold, you can buy gold after the loss in the stock. We have discussed the consumer case. Now let’s talk about the investor as well. If we are taking gold as an investment.
So obviously we want to buy today which means we are of the view that the gold price is fair today and will go up in the coming time. So definitely you can buy Sovereign Gold Bond today. But if you think that the price of gold has already increased, if it is too high, what can you do in that situation?
Investing in FD
You can invest that money in FD. There are short-term FDs of 3 months to 6 months. You can buy sovereign gold bonds when the price of gold cools down a bit. Suppose the RBI issue of Sovereign Gold Bonds would not come at that time also, you can still buy from the secondary markets. Install Zerodha Case. You can also buy Sovereign Gold Bonds from the exchange. Many people are not even aware of this method so they probably do not consider this product.
disclaimer
I am not a financial advisor. Always engage a Financial Adviser to advise you on financial decisions. Always do your research as the information and tips shared in these blogs are for educational purposes only. The Information and tips are therefore not investment advice. If you decide to invest without your own research, you do so at your own risk. No rights can be derived from the information discussed in this blog. investing involves risks, you can lose (part of) your investment.