Gold is one commodity that shows no sign of losing its sheen in the investment market. It has developed high investor interest in recent times because central banks all over the world have started buying gold as a perfect hedge against economic, political, or social crises, fiat currency crises, stock markets vagaries, inflation, fluctuating interest rate changes and war. After all, it’s the most liquid asset in the world. If you sell gold [coins and bars, not jewellery] anywhere in the world, you get its due worth without any exchange rate issues. And it appreciates fast. Hence, at least 5 per cent of your portfolio or asset should be allocated to gold [investment instruments not jewellery as it is not a mode of investment]. There are many options that help you invest in gold.
Gold coins, bars or bullions
This is the most common form of gold investment. It involves physical ownership of the metal in the form of gold coins or bars that are available in different denominations starting from 1g and in two forms of purity—99.5 and 99.9. It’s advisable to buy these from banks or known dealers.
- Easily available
- Gives you the satisfaction of owning gold and holding it
- Easy to sell
- Can be privately held and stored locally.
- Fear of theft or loss in case you don’t have a safe deposit box
- Chances of getting adulterated goods
- No price transparency as physical gold is available at a price that does not reflect the on-going rate.
Exchange traded funds
An exchange traded fund known as the ETF is a mutual fund that allows you to buy units just like you buy shares on a stock exchange. Minimum 90 per cent of the asset allocation of these funds is in gold and remaining 10 per cent in money market instruments. You need a demat account to subscribe to an ETF as the units are stored in demat form.
- No fear of loss or theft
- No need of a safe deposit box. All you need is a demat account [you can use your existing demat account for the same] and a trading account
- Real time price—Gold ETF reflects the real time price of gold unlike when you buy gold in physical form
- No wealth tax applicable.
- Liquidity takes time since there is no physical ownership
- You do not receive gold on redemption of units unless you have units that are equal to the funds ‘creation size’, which is a certain number of units
- Delivery centre for physical gold is only in Mumbai
- Brokerage and demat costs
- Tracking error in case fund house invests in money market instrument or in gold mining stock.
When selecting an ETF, choose the fund with the least expense ratio.
Launched by the National Spot Exchange Limited [NSEL], e-gold enables offers flexibility of buying gold in any denomination. It is similar to buying physical gold but in a demat form. However, investing in e-gold requires a separate demat and trading account with an empanelled depository participant [look up the National Stock Exchange site for a list].
The clearing and settlement [pay-in and pay-out] are based on transaction plus two days basis. Unlike in the ETF, you can redeem units in physical form starting with 8g. Delivery of physical gold is in Mumbai, Ahmedabad and Delhi, with more centres in the pipeline.
- No hassle of holding physical gold
- Flexibility of redeeming units as physical gold or as financial instrument
- No price discrepancy—Since NSEL operates pan India, prices quoted for e-gold are same across the country
- Genuine—the physical gold is certified for purity
- Cost effective as it does not involve management cost or other recurring expenses associated with Gold ETF
- E-gold directly tracks physical domestic gold prices mitigating currency risk better as prices are converted into local currency
- More trading time—trading in e-gold is open till 11.30pm.
- There’s the hassle of opening and maintaining the extra demat and trading accounts
- E-gold is taxable in the same way as physical gold. So, wealth tax and long term gains tax are applicable after three years
- Taking physical delivery attracts one per cent Value Added Tax, 0.1 per cent octroi [if you stay in Mumbai] plus processing charges.
Gold fund of funds
Being a fund of funds, it allows investing in gold without a having demat account. The fund invests in Gold ETFs run by the same fund house, which invest in gold. These funds are passively managed funds suitable for long term investors as they offer the option of Systematic Investment Plan [SIP].
- The SIP allows you to mitigate market risk and volatility and build your portfolio over time
- Similar to mutual fund, it offers options like Systematic Transfer Plan [STP] and Systematic Withdrawal Plan [SWP]
- Relative easy liquidity
- No concerns of purity and safety.
- Since it is a fund that invests in another fund, it incurs dual recurring expenses
- If you redeem within one year, 2 per cent exit load is applicable.
These charges can be considerable if your investment is huge.
Futures allows one to trade specific quantity of gold [in a lot] at an amount and price decided now but with a settlement day in the future. Trading in futures requires opening a specific account with a maximum deposit of INR 1 lakh. Part of the money is margin money, required to trade. There’s an option of taking delivery of physical gold by the end of contract period [four months]. Just like in the stock market, you can sell or buy a future.
- You can start accumulating gold at a price much lower than what you would have to shell out in the market
- Opportunity to book large profits as buying is in big lots
- It gives you the chance to make money on the price volatility of the commodity.
- Because of the large lot size, there is a risk of incurring huge losses
- In case you opt for physical delivery at the end of the contract, you require a gold certification and accreditation by an exchange appointed assayer, which increases costs
- Every trade needs a counter party to set off a buy or sell order, which may be difficult to find in case of huge investments
- There is a hassle of opening a separate demat and trading account with the commodities exchange
- You need to always keep liquid cash on stand by in case you require more margin money due to price fluctuations.
Gold that earns
Many households, especially in India, have gold lying around. That gold just sits there occupying valuable locker space and increasing your anxiety. One way to turn that gold into an investment is to deposit it in a bank for a fixed interest rate ranging from 0.75 – 4 per cent. The bank checks the gold for its actual gold content by melting the gold. Based on the purity, you are issued a certificate mentioning the quantity of gold deposited and its purity. The lock-in period is of one year and if you withdraw before that, there is a penalty. When your chosen tenure is over, you can either renew your deposit [like in an FD] or redeem your gold either in coins/bars or cash at the rate prevalent at the time.
- No hassles/risk of physically possessing gold
- Price appreciation on cash redemption
- No wealth tax, no tax on interest earned.
- The minimum gold you can invest is 500g, but there is no upper limit.
- Low interest rate.
- You lose the jewellery, which may have sentimental value.
- When you convert your physical gold into these certificates both entities are separate so it amounts to transfer and will attract capital gain tax depending upon your period of holding. [Tip: You can reduce the tax by immediately converting the gold you buy into a certificate. Since the gap is small your tax liability will be minimum.]
This was first published in the May 2012 issue of Complete Wellbeing.
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