Gold buying on Dussehra: Which is the best way to invest?

The best way to buy gold this Dussehra depends on an individual’s investment goals and risk tolerance.

Dussehra holds a special significance in India, marked by the initiation of new ventures and purchase of gold. For generations, gold acquisition in India predominantly involved physical assets such as coins, bars, and jewellery.

As per Somasundaram PR, Regional Chief Executive Officer-India, World Gold Council, anecdotal feedback from retailers suggests a good pickup in gold jewellery demand around the Dussehra festival.

“Positive net interest scenario but a fall in domestic savings, stock market volatility amidst a highly optimistic domestic economic sentiment, mixed signals on rural demand from FMCG but significant footfalls on jewellery B2B events in recent times and rising GST collections pointing to better compliance and growth, all of which make this festive quarter for gold look very positive but with significant challenges," Somasundaram said.

In recent years, we have witnessed a surge in digital gold investment, emerging as the latest trend in the country. This shift gained momentum following the introduction of sovereign gold bonds (SGBs) by the government, which offer an additional annual return of 2.5 percent, augmenting its capital appreciation.

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“Buying physical gold comes with a lot of risk, the primary being the risk of storage, theft, impurities, etc. However, owning gold in digital form eliminates all these risks and uncertainties. One can invest in gold digitally in forms such as mutual funds, SGBs and exchange-traded funds (ETFs), among others,” said Deveya Gaglani, Research Analyst— Commodities at Axis Securities.

We look at various digital gold investment options and their pros and cons in detail.

Exchange-traded funds

The main goal in a gold ETF is to track the domestic physical gold prices. In short, they are based on gold prices and invest in physical bullion. Gold ETFs are the units representing physical gold. One gold ETF unit equals 1 gram of gold, backed by high-purity physical gold.

“Since gold ETFs are listed, they are quite safe and have higher liquidity. It is ideal for investors who do not want to store gold in physical form and want to invest for a long-term period. However, there are brokerage charges, but way less than making charges in terms of physical gold or jewellery. Also, the expense ratio in gold ETFs is less than gold mutual funds,” said Arvinder Singh Nanda, Senior Vice President of Master Capital Services.

Keep in mind that ETFs track the price of gold, so they are subject to volatility. Additionally, ETFs are not a direct investment in gold, so you do not have the right to take physical delivery of the gold.

Also, to invest in an ETF, one needs to have a demat account. There are entry and exit loads, and the investor has to pay brokerage every time.

Mutual funds

If you do not have a demat account, your next best option is a gold mutual fund (MF). These are open-ended schemes that invest in units of a gold ETF. The ultimate goal of the mutual fund is to create wealth using the potential of gold as a commodity. Each gold MF has a fund manager who makes investment decisions per the fund objective.

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The units of gold MFs are priced differently as compared to ETFs. It is in the form of net asset value (NAV) disclosed at the end of the trading session.

“Gold mutual funds are actively managed, so they have the potential to outperform the gold price over time. They also offer the convenience of investing through a mutual fund house. However, gold mutual funds have higher expense ratios than ETFs, typically around 1-2 percent. Additionally, they are subject to the risk of underperformance, meaning that they could return less than the gold price over time,” said Viral Bhatt, Founder of Money Mantra.

Further, gold MFs have low minimum investment requirements compared to gold ETFs, making them more economically accessible for retail investors. One can invest in a gold mutual fund without opening a demand account. So it becomes more convenient and accessible to more people.

Sovereign gold bonds

Launched by the Government of India in November 2015, the value of SGBs is denominated in multiple grams of gold. The investor base has increased in SGBs as they give an additional return of 2.5 percent per annum.

One needs a broker or a Sebi-authorised agent to purchase it. Once the bonds are redeemed, the corpus as the current market value gets deposited in the registered bank account.

“As the Government of India has launched this scheme, the risk of default is minimal. One will receive a certificate of ownership instead of physical gold, eliminating the risk of storage. Further, no TDS (tax deducted at source) applies to the interest received from SGB investment. If one redeems it after maturity, capital gains tax will be exempted,” said Axis Securities' Gaglani.

However, SGBs have a long maturity period of eight years.

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“If the investors' outlook is for the short term, SGB may not be ideal. However, investors can redeem the bonds after five years from the investment date,” said Gaglani.

Additionally, SGBs are not as liquid as ETFs or gold MFs.

Digital gold

A new type of gold investment is emerging in the form of digital gold, which is a virtual method of buying and investing in the yellow metal without having to physically hold the gold. The minimum buy or sell value can be as low as one rupee.

Digital gold investments are securely stored in encrypted digital vaults without incurring additional costs for physical storage. The responsibility for the safety of the investment lies with the trader, who can, at any time, choose to convert their digital gold investments to physical gold or sell them at the prevailing market price.

“One notable benefit of digital gold is its ease of trading. Buying and selling digital gold is as straightforward as dealing with securities, providing a convenient option for those interested in gold investment. What makes digital gold a lucrative investment is its real-time rate updates, offering investors a clear picture and market assurance,” said Yashoraj Tyagi, Chief Executive Officer of CASHe.

Keep in mind that digital gold may appear to be user-friendly because it eliminates the need for storage or concerns about purity. However, it is imperative for small gold investors to exercise caution, as there are no regulatory safeguards in place for these digital gold offerings.

What should investors do?

The best way to buy gold this Dussehra depends on an individual’s investment goals and risk tolerance.

If you are looking for a liquid and low-cost investment, then SGB is the best option. But not all SGBs are tradeable on the stock exchange, should you require to withdraw prematurely. In that case, either a gold ETF is a good option.

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If you are looking for a more actively managed investment, then a gold MF scheme works, depending on whether you have a demat account. A gold MF can slightly outperform or underperform depending on how much cash your fund manager holds.

Data available with ACE MF shows that gold mutual funds' allocation to the commodity can change based on the fund manager’s reading of the market. For example, funds such as Aditya Birla Sun Life Gold and Axis Gold were holding up to 14 percent cash and cash equivalents in April 2020. The category average as of September 2023 end was less than 1 percent.

Also, if you are looking for a very safe investment with a fixed return, then SGBs are a good option.

“If you are a new investor or if you are looking for a simple and low-cost way to invest in gold, then I recommend investing in a gold ETF. If you are a more experienced investor and you are comfortable with the risk of underperformance, then you may want to consider investing in a gold mutual fund. And if you are looking for a very safe investment with a fixed return, then SGBs are a good option,” recommended Bhatt.