Options to invest in gold


By Amit Kukreja

Our reasons to buy gold have mostly been emotional, religious or traditional needs. We have often ignored the fact that gold is a non-income generating asset. 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 (compounded annual growth rate) 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!

Gold ETF

Gold exchange traded funds (ETFs) 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, tax free capital gains if held for more than one year as opposed to three years in case of physical gold, no wealth tax and no VAT (value added tax). 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 a convenience of doing an SIP (systematic investment plan) 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 Ltd (NSEL), e-gold can be bought by setting up a trading account with an authorised participant with NSEL. Each unit of e-gold is equivalent to one gram of physical gold and is held in the 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 in e-gold, 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 (Multi Commodity Exchange of India) and NCDEX (National Commodity & Derivatives Exchange Ltd) 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.

The writer is the founder of WealthBeing Advisors. He is a certified financial plannerCM (FPSB India).

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