India is the largest consumer of gold accounting for nearly 1/6th of the world’s gold consumption. The sheen of gold has attracted us Indians from times untold. Gold is a popular investment for Indians, across the social strata, because of its status as a safe haven asset that performs when all others fail.
However, in recent times, many Indians are realising that keeping physical gold in bank lockers is not the ideal way to invest in gold. Indians are now seeking better alternatives to invest in gold. Here are the most common ways of investing in gold electronically.
Sovereign gold bonds were introduced by the Government of India to discourage the demand for physical gold and encourage Indians to own paper gold that would benefit the fiscal deficit of the country. The biggest advantage of investing in sovereign gold against any other form of gold investment is the fact that bondholders receive an interest coupon of 2.5% per annum. Sovereign gold bonds have a lock in of 5 years. At the end of the 5 years, the principal received by the investors will be decided on the price of gold prevailing at that time. These bonds are listed on the stock exchanges and investors can actively trade them, in the same way as stocks. Another big benefit of sovereign gold bonds is that they are tax-free for individual investors. Gold bonds also eliminate the risk and costs of storage of physical gold.
Gold ETFs are professionally managed funds that are traded on the stock exchanges. Buying and selling of ETF units happen just like a stock during market hours. There are several benefits of owning gold ETFs. ETFs can be traded like shares and are liquid in nature. ETF holders do not have to worry about theft or pay bank locker charges. However, ETF’s do have an asset management fee of 1% per annum. This can be a significant drag on performance over the long term.
Gold futures are another way of investing in gold. Gold futures, like other commodity futures, tracks the spot price of gold. Gold futures are actively traded on commodity exchanges. However, this product should only be used by investors who are very experienced and have a high risk tolerance. Gold futures offer investors a high degree of leverage which can give high returns but can also magnify losses significantly.
The traditional way of physically holding gold is slowly making way for electronic investment in gold. Out of the electronic methods, sovereign gold bonds is the best as it combines low transaction costs, tax exemption and interest coupons. These reasons ensure that an investment in sovereign gold bonds would give the returns out of all the online methods of investment.