It is festival time and it always reminds me how our folks rush to buy gold around Diwali. Our reasons to buy gold have mostly been emotional, religious or traditional needs. People across the globe have taken to gold as investment in last several years due to global economic slow-down. This in turn has improved CAGR figures of gold.
For people who want to have a portion of their wealth in gold, they must ensure their allocation does not exceed 10% of the portfolio. Here are some ways of investing in gold.
Gold Jewellery, Bars, & Coins: This is the most common form in which gold is bought in India. The advantage of this form is that while you enjoy owning it, it continues to grow in value. If you are buying coins and bars, you can get them from the banks in tamper-proof covers thus ensuring purity. However the disadvantages are that you pay very high making charges if its jewellery. The purity of gold becomes another disadvantage if your gold is not hallmark certified. Getting hallmark certification is another cost added to your purchase. Another disadvantage being converting your jewellery to cash leads to unnecessary bargaining and suspicion about the quality of gold because one tries to sell it at a place that was not the place you bought it from. With physical gold you would incur storage cost. Last but not least, this form of gold attracts wealth tax if the value exceeds Rs. 15 lakhs.
Gold ETF: Gold exchange traded funds have emerged as a highly popular investment avenue among the retail investors. Gold ETF unit is equivalent to 1 gram of gold. They are held electronically in the demat form and traded on exchanges. They offer investors the benefits of security, convenience, liquidity and purity of gold. These funds are required to hold equivalent quantity of standard gold bullion in 99.5% purity. You would need a broking account and a demat account to invest in gold ETFs.
Gold ETFs provide an opportunity to investors to purchase gold in smaller quantities over a period of time. With them, there is an advantage of zero storage cost, no risk of theft, lower capital gains tax if held for more than one year as opposed to three years in case of physical gold, no wealth tax and no VAT. There are as many as 25 different gold ETF schemes across 14 different fund houses at present.
Gold Fund of funds: Some fund houses have launched gold fund of funds, which invest in gold ETFs so that you don’t need to have a demat account. This option of investing gives you the convenience of doing a SIP like investments in gold for a given period. However this comes at a cost. The Fund-of-funds usually charge a 1-2% exit load if the investment is redeemed within a year. And, there is an additional expense ratio of 1.5%.
E-Gold: Offered by the National Spot Exchange Limited (NSEL), e-gold can be bought by setting up a trading account with an authorized participant with NSEL. Each unit of e-gold is equivalent to one gram of physical gold and is held in demat account. Like gold ETFs, e-gold units are fully backed by an equivalent quantity of gold kept with the custodian. These units are traded on the exchange from 10 am till 11.30 pm on weekdays.
To invest in e-gold, investors need to open a new demat account, different from the one used for transacting in equities. This will involve account opening charges. The benefit of long-term capital gains tax is only available after three years, unlike gold ETFs and gold FoF, where the same is available after one year. Also, like in physical gold, investors are liable to pay wealth tax.
Gold Futures: Commodity exchanges like MCX and NCDEX allow investors to take trading positions in gold through a futures contract. A gold futures contract is an agreement to buy (or sell) a certain specified quantity of gold at a price determined today on a specified date in the future. When you buy gold futures, you assume that the price of gold will be higher at the time of maturity. Alternatively you can take a short position and make money if you think gold price will fall in the future. Under futures trading, risks are magnified and, if your calculations go awry even a little, it could lead to large losses in your portfolio.
If you invest in gold futures, you would have to offset your position before the maturity of the contract or you take the delivery of physical gold. Commodity exchanges offer several small-sized contracts. The buyer has to pay the making charges and other statutory levies. Since these are national exchanges, you can take delivery of the physical gold in major cities, including Mumbai, Ahmedabad, Delhi, Hyderabad, Bangalore, Chennai and Kolkata.