Part 1 - Physical Gold, Digital Gold, and Gold ETFs
Part 2 - Gold Mining Stocks, Gold mutual funds and Sovereign Gold Bonds
In 'How to invest in gold for newbies? Part 1 - Physical Gold, Digital Gold, and Gold ETFs', we have primarily written about the vehicles of investment for gold that tend to depend on the price of gold. Gold Mining Stocks, Gold mutual funds, and Sovereign Gold Bonds on the other hand are not valued directly on the value of gold itself, which makes them a little different kind of investment and ones that need separate attention.
Gold Mining Stocks
These stocks are of those companies that specialize in mining and refining gold. These companies will also naturally make higher revenues from rising gold prices. Your investment in these types of companies can be an effective route to profit from gold, contribute to diversifying your stock portfolio, and can also carry lower risk than other investment methods. In the scenario of bullish market rallies, you are likely to make more returns from holding gold mining stocks than gold itself, and also show profits during flat or declining gold prices. The wealth-creating ability of stock markets is ultimately unparalleled to even gold, despite all its risks. For example, if you had invested in its IPO in November 2003, Deccan Gold would have given you a return of over 2000%, with the returns being worth 11200% during its all-time high! In the same time frame, gold has returned 'only' 500%. [this is just to show an example and it not a stock recommendation from pvot.in]
Some of the largest gold mining companies can consist of multi-national operations. These companies are also likelier to have multiple sources of revenue apart from just mining and refining gold. Responsible companies also tend to hedge against a fall in gold prices as a normal part of their business, as elaborated in 'How is hedging done in commodity markets'.
However, it's worth mentioning that the research required to select the best gold mining company for the investor requires due diligence on the investor's part. While it is obvious that more research is required before investing in a company than in the gold commodity itself, it can be a cumbersome task for retail investors, and the next option could solve this problem.
Gold Mutual Funds
Most of you may have figured out by now that Gold Mutual Funds consist of a bucket of Gold Mining Stocks that is managed by professionals in return for a fee. Unlike a Gold ETF, you do not require a Demat account to buy Gold Mutual Funds and the value of your investments depends on the performance of the company itself and not on the current value of gold. The same principles mentioned for individual Gold Mining Stocks apply here.
However, note that in Gold Mining Stocks as well as Gold Mutual Funds, the value of your investments can go down during a bearish period while the value of gold and gold ETFs will likely go up. Therefore, it's very useful for an investor to have both in their arsenal.
Sovereign Gold Bonds
The Government of India introduced the Sovereign Gold Bond, or SGB, in the Union Budget 2015-16 under Gold Monetisation Scheme, under which the issues are made open for subscription in tranches. SGBs are released periodically by the Reserve Bank of India (RBI) and are available through leading public and private sector banks. These bonds are guaranteed by the Government of India.
Investors of these bonds will be compensated at a fixed rate of 2.50% per annum that is payable semi-annually. This fixed-rate compensation is the feature that makes SGBs arguably the most attractive vehicle of investment for gold today. Apart from that, there are zero GST charges and zero making charges levied on SGBs, unlike gold coins and bars, and can also be used as collateral for your loans. The redemption of these bonds at maturity after 8 years is also tax-free though.
Side note: You'll be offered a discount of ₹50 per gram less than the nominal value by the Government of India if you apply online and complete your payment through digital mode.
Bottomline of part 1 and part 2
The key takeaways following both parts of 'How to invest in gold for newbies?' are:
- Physical Gold and Digital Gold are not recommended for investment purposes due to storage and maintenance reasons.
- Gold ETFs will get a higher preference for trading on a Demat account as they have higher liquidity and availability and is directly related to the price of gold.
- SGBs are more suitable if you plan to invest for 5 years or longer as not only will you receive regular interest payouts, but also have the option of making tax-free redemptions after staying invested for a minimum period of 5 years. The redemption of these bonds is also tax-free.