In the past, investing in gold meant buying it physically, which came with concerns about purity, storage, and making charges. Nowadays, with the rise of digital platforms, these challenges have largely disappeared. One of the most convenient and affordable ways to invest in gold today is through Gold SIP, which makes it easier to build a significant holding without the need for a large up-front commitment. Let’s understand what gold SIPs are, how you can start one, and why they can be the perfect addition to your portfolio this festive season.
What Is A Gold SIP?
Systematic Investment Plan, or SIP, is a mode of investment where, instead of making a single large lump sum payment, you invest a fixed amount at regular intervals, such as monthly or quarterly. This method of disciplined investing is often associated with mutual funds, as they popularised SIPs. However, the concept of investing regularly in an asset has expanded beyond mutual funds. So in this blog, when we talk about Gold SIP, we’ll focus on not just the traditional SIPs in gold mutual funds, but also regular investing in other gold assets such as gold ETFs and digital gold.
How Does Gold SIP Work?
The underlying asset in a gold mutual fund is primarily gold-backed securities, such as gold ETFs. Essentially, these funds invest in instruments that closely track the price of gold; hence, the value of your investment replicates gold prices in the market. When you invest in these funds, you are allotted units of the mutual fund, each representing a proportional share of the fund’s gold holdings.
This is similar to how any other mutual fund works. Units are bought at the prevailing NAV, which fluctuates with the market price of gold. As gold prices rise, the NAV increases, and as prices fall, the NAV decreases. With a Gold SIP, you buy a certain number of these units at regular intervals. When you wish to sell, you redeem your units at the prevailing NAV. Since this is a mutual fund SIP, an expense ratio is applicable, which is the fee charged by the AMC for managing the fund.
Types of Gold SIP
While a Gold SIP generally refers to an SIP in a gold mutual fund, the concept of investing regularly in gold can be implemented in different ways:
Gold Mutual Funds
For the most part, a gold fund invests in gold ETFs, but before going further, there is an important distinction to be made. Gold funds are not the same as gold sector funds. The latter invests in shares of companies involved in gold mining and production, rather than directly in gold or gold-backed securities. Since the underlying securities are equity-based, gold sector funds can be more volatile and will not always move in tandem with gold prices. A gold SIP invests in gold funds and ETFs that track gold prices. Before investing, you should check the fund type and its underlying assets to ensure it aligns with your goals. You can also consider taking guidance from an sip investment planner who can help you choose the right gold fund.
That said, SIP in a gold mutual fund is the simplest and most convenient way for investors to gain exposure to gold. You don’t need to open a demat account to begin, and you can start investing just like you would with any other mutual fund. It allows for small, regular investments, provides liquidity, and eliminates the need to worry about storage. The minimum investment amount is low, which makes it a highly accessible option as well.
Gold Exchange Traded Funds
ETFs, like mutual funds, are pooled investment vehicles, but they trade on stock exchanges like shares. Since they are managed by professional managers, an expense ratio is also charged to investors. In the case of ETFs, however, this fee is slightly lower compared to gold mutual funds.
Gold ETFs invest mainly in physical gold or gold-backed securities with the aim of mirroring the price movements of gold in the market. As they are traded on an exchange, one needs to have a demat account to hold and manage these units. Due to this structure, gold ETFs are highly liquid instruments, as they can be bought or sold on the stock exchange during market hours. However, their liquidity can sometimes depend on trading volumes, so on days with lower activity, there might be slight differences between the market price and the actual value of gold. That said, gold ETFs are still highly liquid, though not as much as gold mutual funds, because you can redeem fund units directly with the AMC based on the end-of-day NAV.
SIP in ETFs are not nearly as popular as mutual fund SIPs, and case is the same with gold ETFs. With ETF SIPs, you should know that you have to buy at least 1 ETF unit at the market price listed on the exchange. Let’s take an example to understand this better:
Suppose you want to start a Rs. 1,000 per month SIP in a gold mutual fund. If the prevailing NAV on the investment date is Rs. 100, you’ll receive 10 units. If the NAV increases to Rs. 102 next month, you’ll receive 9.8 units that month; it’s pretty straightforward. Now, in the case of a gold ETF, SIP works a bit differently. Here, instead of a fixed amount, you generally pick a fixed number of ETF units to buy monthly or weekly. Suppose you select 10 units per month. If the price of a gold ETF on the investment date is Rs. 100, you’ll spend Rs. 1,000. If the price rises to Rs. 102 next month, you’ll invest Rs. 1,020 that month. That’s why, for ETF SIPs, a wallet balance or margin needs to be available in your trading account to accommodate these fluctuations in gold prices.
While SIP of a fixed number of units is more common in the case of ETFs, you can also dedicate a fixed amount per month or week to start your SIP. This second option may lead to some leftover balance in your wallet, and not all your money may be utilised.
Digital Gold SIP
Digital gold is an alternate way to buy, sell, and store gold online without physically handling it. This service is provided by three companies in India: MMTC – PAMP, SafeGold, and Augmont. These providers partner with popular digital platforms such as Google Pay, Paytm, and PhonePe and allow users to conveniently invest in gold starting from as little as Re. 1.
Here as well, you have a choice.
You can invest either by selecting a fixed weight of gold (in milligrams or grams) or by investing a fixed amount. The quantity you select is credited to your account based on the real-time market price of gold. This gold you purchase is backed by 24k physical gold stored securely in the provider’s insured vaults. You can make instant purchases or sell your holdings at any time directly through your platform of choice. If you need, you also have the option to redeem your digital gold in physical form, which is delivered to your home.
Digital gold SIPs are not very popular, and not all platforms offer them. However, those which do work on the same principle as a mutual fund SIP. They allow you to automatically invest a fixed amount or quantity of gold at regular intervals, without needing a demat account, while also offering high liquidity.
Benefits of Gold SIP
Let’s take a look at some reasons why you should consider investing in the precious metal through Gold SIP:
Highly Affordable and Accessible
Investing in gold physically can be expensive. With gold SIP, you can start investing with as little as Rs. 500 per month. This makes gold affordable to a wide range of investors, who can then slowly build their portfolio. Plus, it’s far more convenient to set up and manage your gold SIP online. You can invest from your home, knowing that your investment is backed by pure gold.
Diversification and Hedge Against Inflation
Gold is often considered a safe haven asset, which makes it excellent for portfolio diversification purposes. It tends to perform well during uncertain times and protects the purchasing power of your money.
Rupee Cost Averaging
This effect happens when you regularly invest a fixed amount in a gold SIP, regardless of the gold price currently in the market. That way, when gold prices are low, your fixed investment buys more units, and when prices are high, it buys fewer units. This averages out the cost of your investment and thus reduces the impact of market fluctuations.
Liquid Investment
Gold funds, ETFs, and digital gold are all highly liquid instruments that can be sold whenever needed. Gold fund units can be redeemed directly with fund house, and ETF units can be sold on the stock exchange. This solves a major limitation of physical gold, which can take some time to sell.
Builds Discipline
Any SIP encourages regular, disciplined investing. When you save and invest consistently, you build a habit of putting money aside for your future, which is essential for long-term success.
No Need To Worry About Storage or Theft
With physical gold, you’ll need to spend extra money for secure storage and maybe even insurance. Gold ETFs and digital gold are backed by gold that is safely held in vaults. So investing electronically eliminates worries and reduces the risk of loss.
How to Start a Gold SIP
Once you’ve figured out how much gold you want to buy and what your financial goal is, you can choose the most suitable medium. Here are some general steps to help you get started with your Gold SIP across the three investment options we’ve discussed above: Gold Mutual Funds
- You don’t need a demat account, so you can start by exploring and comparing different gold mutual funds based on their past performance, expense ratios, lock-in periods, and fund AUM.
- If you’re having a hard time finding the right funds, don’t hesitate to seek help from a professional. The best sip planner will recommend you well-reputed funds based on your goals and risk tolerance.
- Next, decide on your investment amount and frequency. The minimum investment amount differs from AMC to AMC, but you can often start with as little as Rs. 500 per month.
- Complete the KYC process.
- Set up the automatic payment system.
- Monitor your SIP periodically.
Gold ETFs
- You’ll need a demat account to hold your gold ETF units, so if you don’t already have one, open an account with a broker.
- There are a number of gold ETFs available in the market. Choose the ones which closely track gold prices, have high AUM, and provide adequate liquidity.
- Decide whether you want to buy a fixed number of units or invest a fixed amount regularly. If a platform offers the ETF SIP service, it’ll likely have both these options available.
- Choose how often you want to invest. Some platforms even allow you to enter the exact time at which you want the trade to occur.
- Once you’ve set up the auto payment, you can sit back and monitor your progress.
Digital Gold
- Digital gold SIPs are not very common, so first you’ll need to check if your preferred platform offers SIP service.
- If it does, you can set up a weekly or monthly SIP with fixed amount or fixed grams of gold.
- You can easily monitor gold prices in the app and choose to either sell your investment or redeem for physical gold if needed.
Conclusion
Gold SIPs offer a convenient and hassle-free way of investing in the precious yellow metal. These SIPs are most commonly associated with gold mutual funds, however, in recent years, many platforms have introduced an SIP feature for investing in gold ETFs as well. Though not as widespread, some platforms now even support SIPs in digital gold. Investing in a Gold SIP has many advantages. Not only do you gain exposure to gold as a hedge against inflation, but you also enjoy benefits like rupee cost averaging, diversification, and disciplined investing.
