Considering that this asset class offers considerable diversification from conventional equities and debt investments, the custom of purchasing gold for Diwali appears to have been carefully considered. Gold is a haven in unstable economic times. Along with being a hedge against inflation, it can also provide some protection against rupee devaluation, which is particularly important for us. For instance, gold has gained 5.3 percent when expressed in terms of the rupee but has lost approximately 9.4 percent of its value when expressed in dollar terms. As a result, it has outpaced the benchmark index Nifty 50, which has gained 1.3 percent YTD, succeeding in a high inflation environment.
Charts indicate that the price of gold could decline from its present level of Rs 50,626 (per 10 grams) in the near future before reaching new peaks. But considering that gold has a history of being a safe haven, it is always preferable to adopt a long-term perspective and hold some of it in your portfolio rather than being overly short-term focused. Diwali may also be a suitable time to take the exposure emotionally.
Sovereign Gold Bonds (SGBs), gold ETFs (Exchange Traded Funds), gold funds, digital gold, bars, and coins are just a few ways to invest in gold. SGBs are backed by the RBI, although they have an eight-year investment horizon and a five-year lock-in term. Selling in the secondary market after lock-in is permitted, but due to liquidity concerns, it is more difficult said than done. The fact that there are no regulations governing the operation of digital gold makes it more expensive for you. Because bars and coins are tangible objects, storage space may be an issue. At this point, gold ETFs start to make sense for investors.
There is no lock-in period for gold ETFs. Some ETFs can be held electronically, have low fees, and have high liquidity. As a result, there are no storage issues. Above all, the gold ETF is subject to strict regulation and is governed by SEBI. Similar to stocks, they can be bought and sold online through exchanges. When historical returns are taken into account, the performances of all the mentioned ETFs are comparable. These have roughly the same returns over three and five years, coming in at 8.7% and 10%, respectively.
The SIP option to invest in Gold ETFs is provided by gold funds, which are essentially funds of funds, for a somewhat higher fee than ETFs. If you do not have a Demat account, you can utilize this method. Both gold ETFs and gold funds are subject to taxes. When it comes to taxes, long-term capital gains are subject to a 20% rate with an indexation advantage while short-term capital gains are subject to the slab rate.