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Gold Investment in India – How to Invest, Options, Benefits

Gold Investment in India – How to Invest, Options, Benefits

Gold has always been one of the investment options that are close to people in our country. While many think that gold is only used for jewellery, gold makes an amazing investment too. It is also regarded as the haven when the stock market goes down south due to the negative correlation between the two asset classes. Earlier, investing in gold meant buying gold in physical format, but with changing times, investing in gold has evolved as well and this article will talk about ways to invest in gold, benefits and risks and a lot more.

Why Should You Invest in Gold?

If you are wondering why you should invest in gold while there are so many other investment options, here are some facts and reasons you should be aware of –

  • Inflation-beating returns: One of the primary reasons for investing in gold can be its inflation-beating returns. While in the past 20 years, the average inflation was around 6.4%, the gold prices surged by 12.4% which is almost double the inflation rate. This means the real return is around 6%. Often investment vehicles flat to offer returns that beat the inflation, even if they do, the risk involved remains on the higher side in most cases. Gold is one of few such investment options which offer returns which beat inflation without having too much risk involved.

  • Safe haven for investors: If you invest in equity, one of the best investment options to hedge your investments’ risk is gold as gold has an inverse relationship with the equity market. If you go through historical price charts, you will find that whenever there is a stock market crash, gold prices surge. This is why, hedging your equity investments with gold can be beneficial.

  • Easy to invest: There are multiple ways you can invest in gold. You can buy physical gold, digital gold, gold ETFs, and gold mutual funds too. With evolving technology and changing investment landscape, investing in gold has become easier and safer as well.

  • Liquidity: Gold is regarded as an alternative investment, and most alternative investments, have liquidity issues to put it in simple terms, alternative investments are tough to sell and but with gold, this is not the case. In times of crisis, you can easily encash gold investment and thus it is regarded as one of the most liquid investments, especially in the alternative investment arena.

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What are Gold Funds?

While the easiest way to invest in gold is buying the yellow metal in its physical form, that comes with certain drawbacks. Thus, here are new-age ways to invest in gold without having them in physical form and here the gold funds come in. There are two types of gold funds which are -

  • Gold ETFs: These are electronically traded funds whose underlying assets are physical gold and gold mining or refinery companies’ shares. These are traded on the stock exchanges like any other company’s stock.
  • Gold Mutual Fund: These are funds of funds which invest in gold ETFs as their underlying assets. These are managed by the asset management companies (AMCs). As these are mutual funds with gold as underlying, you can invest in them like any other mutual funds as well.


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How to Invest in Gold?

If you are wondering how to invest in gold then here are the details. The method of investing in gold depends on the format of the gold you are investing in.

  • Physical gold: You can buy physical gold from any jewellery house.
  • Digital gold: Many online wallets, and fintech apps, offer digital gold where you can buy the gold as per the current price of physical gold in the market, but you do not have to take the delivery in the physical format. You can buy as per your requirements, usually, the minimum purchase has to be of 1 gm of gold.
  • Gold Mutual Funds: Just like any other mutual fund, you can invest in a gold mutual fund. You can opt for either lump sum or SIP method which suits your requirements and investment preference. There are different mutual fund apps which offer gold mutual funds as well.
  • Gold ETF: For investing in Gold ETFs, you need to open a Demat and trading account as these gold ETFs are traded in the stock market. Once you open these accounts, you can directly purchase the gold ETFs and you can trade in the market or stay invested for the long term to gain significant returns.
  • Sovereign Gold Bonds: One of the debt instruments that allows you to invest in gold is Sovereign Gold Bonds. These bonds are offered by RBI from time to time via public and private banks. The return of these bonds is guaranteed by the government of India and thus, you can get a secure stream of income by investing in these sovereign gold bonds.


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Gold Investment vs Mutual Funds

Retail investors always find it intriguing to choose between gold investments and mutual funds as both offer some really good prospects that retail investors want. However, both are different and you can also differentiate between these two depending on your choices of investments and other factors. Here is a short comparison between two of the most popular investment vehicles in the country –

Basis Gold Investments Mutual Funds
Definition Gold is a metal which is of high value due to its scarcity and demand Mutual Funds are investment instruments where money from different investors is pooled together to invest in different securities to generate a return.
Returns Gold investments offer returns as and when the price increases of the underlying gold whether it is in physical form or ETFs. Mutual funds offer a return when the value of the fund increases depending on the underlying securities and it also pays dividends if you opt for the dividend plan otherwise it gets added to the NAV.
Management Gold investments are usually directly managed by the investors Mutual Funds are managed by fund managers who are experts in financial research and analysis
Costs If you are investing in gold in physical format, you have to pay only the price of the metal and the making charges if you are taking it as jewellery. There are no other charges. You have to pay an exit fee if you redeem mutual funds units without a stipulated period, then there are expenses of the fund managers which is known as the expense ratio.
Risks Having physical gold means you have to be highly secretive and protective as risks of burglary, theft remains high Mutual Funds are safe compared to investing in Gold in a physical format.

What is the Minimum Investment Requirement for Investing in Gold?

If you are considering gold as an investment, then you need to be aware and keep yourself updated about the minimum investment requirement for gold. If you are investing in Physical Gold, then the minimum amount depends on the quantity of the gold. However, the average price of a 1 gm gold coin at present is around Rs. 6000. However, it varies as the gold price varies.

For investing in sovereign bonds and Gold ETFs, you would need around Rs. 5000 as the minimum investment while you can start investing in Gold mutual funds with even Rs. 100 also and digital gold investment can be done with even Re. 1.

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Taxation of Gold Investment Options

Now coming to the taxation of gold investment, it is crucial to understand the taxation rules as it will help you understand and accurately estimate the gold investment returns in India. When you purchase gold as an investment in the physical form or digital form, then you will have to pay GST on gold of 3%. This is the indirect tax that is levied on physical and digital gold and not on other forms.

Direct tax or income tax is levied on the returns generated by gold investments which are categorised into long-term and short-term capital gain taxes. On returns generated by physical gold, digital gold, gold mutual funds, or gold ETFs, if the holding period is less than equal to three years, then the returns will be subjected to short-term capital gain taxes. While for a holding period above 3 years, the returns will be subjected to long-term capital gain taxes at the rate of 20% along with indexation benefits.

Coming to sovereign bonds, are taxed a little differently. The interest generated by these bonds is entirely taxable as per the tax slab you fall into. While if you redeem the bonds before maturity but after five years, then the gains will be tax-free and also if you hold the bonds till maturity. However, if you trade and sell these bonds on the stock exchange, then the profits will be subjected to short-term or long-term capital gain taxes depending on the holding period discussed above.

Things to Consider Before Investing in Gold

While gold as an investment can be beneficial for anyone, there are certain things to be kept in mind before investing in gold in any form.

  • If you are purchasing physical gold for investment purposes, then you need to keep it safe as the chances of theft are high. Also, you need to check the quality of the gold as often jewellers mix impurities to make a profit.
  • In the case of digital gold, you need to invest with trustworthy wallets and fintech apps as digital gold lacks government regulations at present.
  • People investing in gold ETFs and gold mutual funds, need to be updated and have an understanding of how the market moves and gold prices are affected by price movements.
  • Sovereign gold bonds have sovereign default risk though it is negligible.

Disclaimer :

*Tax benefits are as per the Income Tax Act, 1961, and are subject to any amendments made thereto from time to time’

The article is meant to be general and informative in nature and should not be construed as solicitation material. Please read the related product brochures for exclusions, terms and conditions, warranties, etc. carefully before concluding a sale.
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Frequently Asked Questions (FAQs)

For how long can I stay invested in Gold?

Physical and digital gold have no limit on investment tenure, however, sovereign gold bonds have maturity and gold funds also do not have any maturity period.

Is gold investments a liquid investment?

Gold is one of the most liquid investments as you can sell it easily in the market whether in physical form or the form of funds.

How to invest in gold mutual funds?

You need to find out the mutual fund house that offers gold mutual funds and then open an account with them and invest after completing the KYC process.