Gold is unarguably one of the best investment options out there for obvious reasons. Historically, gold has performed well in times of economic turmoil and uncertainty; therefore, investors are still keen on investing in gold. Apart from the traditional method of investing in physical gold, there are a few other choices like Gold ETFs, Digital Gold, Mutual Funds, and Sovereign Gold Bonds for people who are looking to invest in Gold. However, as with any other investment, gold comes with its own set of risks. Here are some of the common risks associated with various gold investment options:
Possession of gold in the form of jewelry, coins, or bars is still seen as a wealth and status symbol. The wealthy and poor alike cherish the yellow metal in the form of jewelry, but they come with high risks. The obvious risks associated with physical gold are chances of theft, concerns about purity, and safe storage. Apart from these, physical gold also has hefty manufacturing and GST charges, in addition to storage and insurance charges. When trying to resell the physical gold items, be it jewelry, bars, or coins, these charges are irrecoverable.
Gold Mutual Funds:
Gold mutual funds are one way to invest in gold without investing in physical gold. Mutual funds are not fully devoid of risks and are considered a medium-risk investment, although they don’t have storage issues or risks of theft that comes with physical gold. One major risk associated with Gold mutual funds is the credibility of the issuer. Another risk associated with them is that gold mutual funds are affected by real-time market fluctuations. This is because mutual funds are backed by real-time gold prices.
Digital gold is a relatively new form of investment, and therefore, one big risk associated with them is the lack of a regulatory body. With no regulation, digital gold investments do not offer much transparency, which leaves a lot of gray areas for exploitation. Another risk associated with digital gold investments is the limitations in regards to how much and how long one can invest. As of now, Digital Gold can only be kept for two years without any additional charges for storage, and no more than two lakhs can be invested into it.
Gold ETFs come with high management costs and increased tax liability and can only be redeemed as cash. When it comes to Gold ETFs, the investor doesn’t own any physical gold. However, when it comes to taxation, Gold ETFs are considered collectibles and treated the same as any physical gold. Some other risks associated with ETFs that are often overlooked are counterparty risks and asset liquidation.
Sovereign Gold Bonds:
Sovereign Gold Bond value is backed up by the gold prices in the international markets. SGBs are government securities and are considerably safer investment options. This is not to say that there aren’t any risks associated with them. One major risk associated with SGBs is that investors are susceptible to a capital loss if, in any case, the market price at the time of redeeming is at lower price than the market price when it was bought. Another risk associated with SGBs is the credibility of the issuer; make sure to approach only a SEBI authorized broker.