Alternatives for physical gold carry the same value as the precious metal and are associated with lower transaction expenses, lower taxes, and more liquidity. With these advantages, you may want to think beyond physical gold this Akshay Tritiya.
Here are the 5 alternative investments you can consider instead of physical gold:
Gold Mutual Funds
These are open-ended mutual funds that invest primarily in gold ETFs (exchange-traded funds) and stocks of companies engaged in gold mining/refining/marketing. In India, gold funds follow a fund of fund structure with its underlying asset being the precious metal. Thus, any increase or decrease in gold prices affects their value.
The NAV (Net Asset Value) of gold mutual funds replicates the price of the commodity daily. These funds are a better alternative to physical gold as they do not have problems related to the precious metal’s safety, liquidity, and storage cost.
Gold Exchange-traded Funds
Gold ETFs are commodity-based stocks that invest money in gold in a more cost-effective way. They act like stocks and are traded on both the stock exchanges (NSE and BSE) in a similar manner. The underlying assets of these funds are physical gold or shares of gold mining or refining companies.
The price of gold ETFs represents the closest actual price of pure gold, with their benchmark being the physical gold price. It offers the benefit of transparent pricing besides being a low-cost alternative to physical gold due to the low buying/selling charges. To invest in these ETFs, you will mandatorily need to have a Demat account.
Recently, digital gold has emerged as a popular alternative investment to physical metal. It is a virtual method of buying this precious metal without receiving it physically. Various companies in India, all in association with Switzerland’s MMTC-PAMP, offer digital gold.
You can buy/sell it online with a minimum buy/sell value of Rs. 1. You can also opt for a gold accumulation plan to buy gold with installments as low as Rs. 1,000.
For every gram of digital gold that you buy online, physical gold is stored in insured vaults by the seller on your behalf. The purchased metal has 99.5% purity, i.e. 24K certification. Digital gold is highly liquid as you can sell it anywhere, pledge it for loans or exchange it for its physical form.
Sovereign Gold Bonds (SGB)
In 2015, the Indian Government introduced this new alternative investment to reduce the import burden on this yellow metal. The Reserve Bank of India (RBI) issues these government securities in denominations of grams of gold.
The minimum investment amount for SGBs is 1 gram, while the maximum ceiling is 4 kilograms per annum for individuals. SGBs offer the advantage of lower transaction costs, a sovereign guarantee, and no maintenance charges. In addition, it offers a 2.5% interest rate per annum, which is paid semi-annually.
Commodity exchanges like MCX, BSE, and NSE have gold futures contracts. Businesses involved with manufacturing, trading, exporting, and importing gold use them as a tool to hedge against price movements. Futures in smaller denominations are also available for individual investors.
These futures have a fixed date for buying/selling the asset, but its price varies depending on the day of settlement. If you have the skill to predict future gold prices, this contract will allow you to benefit from price movements.
Gold is a very popular investment option in India as it acts as a hedge against inflation during times of economic distress, natural disasters, government failures, etc. However, investing in the physical metal comes with the problems of storage, theft, and making changes. That is why many investors now think beyond physical gold to diversify their portfolios.