In this current environment, where we’ve witnessed a bull run across asset classes over the last five years, to deploy a certain amount of capital as hedges to protect one’s investment is a prudent choice. Though Indian domestic scenario remains robust, given the increased pace of government reforms, a stable inflation rate and a good monsoon boosting demand, our financial markets are still heavily influenced by foreign fund flows. On the horizon there are global headwinds – rising bond yields, tightening of monetary policy by the Federal Reserve, a possible banking crisis in Europe and a secular slowdown in global trade. All these factors indicate a significant downside risk; even for portfolios in India. And though the metals are not standard return generating assets, in times of crisis they tend to conserve capital and even generate real returns. To effectively invest in precious metals AMCs offer a good avenue through their funds of funds. Here the expense ratios might be a pinch but they offer ease of exit and do not keep your capital locked-in, which is the case with Gold bonds. If you trade often Gold ETFs are another option and for leveraged individuals, Gold and Silver futures on MCX offer yet another option. Below we’ve listed out, in detail, various options to invest in Gold and Silver.    
  Physical Gold Gold ETFs Gold Funds Sovereign Gold Bonds Gold Monetization Scheme
Investment Limit No limit No limit Minimum Rs. 1000, no upper limit 2,5 and 10 gm denominations, max 500 gms Minimum 30 gms, no upper limit
Liquidity Can be sold anytime to jewelers, but at discount Can be sold on exchange, subject to volume Can be redeemed whenever Can be sold on exchange, but liquidity an issue Can be sold before maturity at penal interest
Tenure/Lock-in No No No 8 years, with exit option from 5th year Varying deposit tenures
Interest Earned None None None 2.75% on initial value of purchase, payable semi-annually 2.25% medium term, 2.5% long term and Bank denominated for short term
Expenses   Making charges of up to 20% of purchase value; locker charges Expense ratio around 1%,; demat maintenance charges Expense ratio around .5% over and above ETF expense ratios around 1%; no demat required None None
Taxation   Long term capital gains at 20% after 3 years,  before 3 years taxed at income slab Long term capital gains at 20% (post indexation) after 3 years,  before 3 years taxed at income slab Long term capital gains at 20% (post indexation) after 3 years,  before 3 years taxed at income slab No tax on capital gains on maturity, Long term capital gains at 20% (post indexation) after 3 years on exit Both interest income and capital gains are tax free
Pros   Allows physical ownership, can use the asset while holding for investment No hassle of safekeeping, allows for purchase in small denominations No hassle of safekeeping, allows for purchase in small denominations Enjoys dual benefit of coupon plus capital gains Idle jewelry can earn tax-free interest’; safekeeping by bank
Cons   Safekeeping a headache. May not fetch best price on redemption Insufficient trading volumes can lead to NAV differing from spot price Dual expense ratios 500 gms limit. Long duration Possibility of getting lesser amount of Gold owing to impurities
  Physical Gold Gold ETFs Gold Funds Sovereign Gold Bonds Gold Monetization Scheme
Investment Limit No limit No limit Minimum Rs. 1000, no upper limit 2,5 and 10 gm denominations, max 500 gms Minimum 30 gms, no upper limit
Liquidity Can be sold anytime to jewelers, but at discount Can be sold on exchange, subject to volume Can be redeemed whenever Can be sold on exchange, but liquidity an issue Can be sold before maturity at penal interest
Tenure/Lock-in No No No 8 years, with exit option from 5th year Varying deposit tenures
Interest Earned None None None 2.75% on initial value of purchase, payable semi-annually 2.25% medium term, 2.5% long term and Bank denominated for short term
Expenses   Making charges of up to 20% of purchase value; locker charges Expense ratio around 1%,; demat maintenance charges Expense ratio around .5% over and above ETF expense ratios around 1%; no demat required None None
Taxation   Long term capital gains at 20% after 3 years,  before 3 years taxed at income slab Long term capital gains at 20% (post indexation) after 3 years,  before 3 years taxed at income slab Long term capital gains at 20% (post indexation) after 3 years,  before 3 years taxed at income slab No tax on capital gains on maturity, Long term capital gains at 20% (post indexation) after 3 years on exit Both interest income and capital gains are tax free
Pros   Allows physical ownership, can use the asset while holding for investment No hassle of safekeeping, allows for purchase in small denominations No hassle of safekeeping, allows for purchase in small denominations Enjoys dual benefit of coupon plus capital gains Idle jewelry can earn tax-free interest’; safekeeping by bank
Cons   Safekeeping a headache. May not fetch best price on redemption Insufficient trading volumes can lead to NAV differing from spot price Dual expense ratios 500 gms limit. Long duration Possibility of getting lesser amount of Gold owing to impurities
    Additionally, for trading purposes one can look at Gold futures on MCX-
  • Gold-
    • Expiry on 5th day of the month
    • Lot size 1 kg, quote 10 gms
    • Fresh contracts every 2 months
    • ~4% margin
    • Near month futures trade around 2k-3k contracts a day
 
  • GoldMINI-
    • Expiry on 5th day of the month
    • Lot size 100 gms, quote 10 gms
    • Fresh contracts every month
    • ~4% margin
    • Near month futures trade around 2k-3k contracts a day