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4 Smart Ways To Invest in Gold - Outside View by PersonalFN

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4 Smart Ways To Invest in Gold
Nov 23, 2017

We Indians have insatiable appetite for gold. We keep buying the precious yellow metal for a variety of reason and on various occasions. For over decades, gold has been considered a traditional safe haven, a currency of choice, a store of value, a hedge...and hence one cannot abjure owning it in the investment portfolio.

Many investors prefer to invest in gold the conventional way. Yes, you got it right - by purchasing gold in a physical form i.e. in the form of gold jewellery or coins or bars - as buying into the precious yellow metal is driven by emotions. The only advantage of purchasing physical gold is that you can touch, feel and see. But it is noteworthy that, by buying physical gold comes at a price, as there are some major disadvantages of buying and holding gold in a physical form. They are:

  • Holding cost: Holding cost refers to the cost of holding a security for instance, the locker rent.
  • Quality: If you buy a certain amount of gold from your jeweller and sell the same piece of gold (either coins or bars or jewellery) to another jeweller, then the quality of your gold will always be questioned.
  • Premium: Very often jewellers and banks sell gold coins and bars at a premium, to the market price. So, the pricing of gold varies depending on the vendor. Ultimately you always pay a higher price to acquire your gold in the physical form.
  • Resale Value: Often jeweller doubts the quality of gold held by you - and therefore pays you a less price, while in case of jewellery, deducts making charges which are added while buying gold). And as regards banks are concerned, they refuse to buy back gold (due to RBI regulation).
  • Tax: In order to be eligible for long term capital gains, you need to hold your physical gold for more than 3 years. Thus, if you were to sell your gold holdings within 3 years you would be liable to capital gains tax based the tax slab under which you fall.

However, today in the "E- world" where everything is available with one click from the comfort of your home, gold too can be purchased in most unconventional ways. Gone are the days when gold was purchased only in conventional form. Thanks to technology, you can buy gold just like you would buy a branded bag - online.

The unconventional way of buying gold facilitates you to invest in gold in a non-physical form i.e., either through paper form or even in non-paper form (which is electronic form), but they offer the advantages of investing in gold.

Here are the 4 smart and unconventional ways of investing in gold:

  1. Gold ETF

    Before understanding Gold ETFs, let's first understand what is meant by Exchange Traded Funds (ETFs).

    ETFs are schemes offered by mutual fund houses that are listed and traded on a stock exchange. They represent ownership in an underlying security, commodity, or asset. It simply means, a Gold ETF is an instrument that represents an ownership of gold assets. This gold is held on your behalf by an appointed custodian for the ETF.

    Gold ETF's are open-ended funds that track prices of gold. Each unit of gold in the fund you can buy is equal to 1 gram of gold (some fund houses also offer 1 unit at 0.5 gram of old). When you buy a Gold ETF, you get a contract indicating your ownership in gold equivalent to the rupee amount of your investment. Notably, you will not get to see or receive delivery of the gold you own - you will only have a contract that represents your ownership interest.

    Gold ETFs are listed and traded on a stock exchange. Hence, these can be bought and sold like stocks on a real-time basis. But to own them, you need to open a demat account along with a share trading account with your broker. While transacting in Gold ETFs, you are required to simply call your broker and place your orders (at the prevailing market price), or transact through the online trading application he/she provided (broker).

    We believe that investing in Gold ETFs is a smart way to invest in gold, mainly, for the advantages offered by it. For gold bugs, investing in Gold Exchange Traded Funds today is a very simple and a lucrative exercise, especially now with the rise in price due to GST.

  2. Gold Savings Fund

    Gold Saving funds (also known as "gold funds"), is another relatively new breed of unconventional way to invest in gold. Gold Saving funds are generally fund of fund schemes which invests their corpus into an underlying Gold ETF which benchmark their performance against the physical prices of gold. Hence by doing so, they attempt to provide returns that closely correspond to the returns of its underlying Gold ETFs.

    Even though "Gold Saving funds" are passively managed, the most wonderful thing about them is that, they provide you the opportunity to invest in gold without really having to worry much about how to store it physically, since units are allotted to you. But here, unlike Gold ETFs (where you hold units in your demat account); in gold funds you are allotted with units of the fund in a paper form (it reflects in the mutual fund account statement).

    The annual expenses charged by Gold Savings funds may be comparatively higher than what is charged for Gold ETFs, as it includes the additional fund management cost along with the cost of Gold ETFs. Thus, investors having a demat account, may find it cheaper to buy Gold ETFs instead of applying in this fund. However, for investors not having demat account, gold funds may be cost effective investment option for investing in gold in a paper form, because here you do away with the annual charges of holding a demat account (which you incur while holding Gold ETFs). Moreover, gold funds apart from lump sum investing, offer the Systematic Investment Plan (SIP) mode, which is effective and convenient way of investing regularly in gold.

  3. Sovereign Gold Bond

    In order to tackle the Current Account Deficit problem, the government of India in its Union Budget 2015-16, proposed to develop a Sovereign Gold Bond Scheme (SGBS) as an alternative to purchase physical gold.

    One can purchase these bonds via banks, Non-Banking Finance Companies (NBFCs), post offices and agents. They are available in denominations of 5, 10, 50 and 100 grams, but for investment over a sum of Rs 50,000 furnishing a copy of PAN card is mandatory. These bonds can be held in paper or demat form. An individual can buy a maximum of 500 grams in a period of 1 year, under this scheme. Gold bonds have a minimum tenure of 5 to 7 years, which takes care of short-term and medium-term volatility. Nevertheless, you can redeem them before the end of this period by selling them on the exchange.

    Moreover, you earn interest at the rate of 2.50% on initial value of investment. Its frequency of payment is once in six months.

    The gains, made on investments are exempt from the tax at maturity and there is no Security Transaction Tax (STT) imposed on trades. But the gains made after 3 years, are subject to long-term capital gains, but indexation benefit can be claimed. The interest accrued to you, the bondholder is taxable, though no tax will be deducted at source.

    While the means of taking exposure to gold depends on your suitability, sovereign gold bonds definitely have an advantage over other ways of investing in gold such as physical gold, gold ETFs (Exchange Traded Funds), and gold savings funds. This is because gold bonds, apart from capital appreciation, also enable an investor to earn interest on their investments. This is not the case in other instruments.

  4. E-Gold

    "E-Gold" is a unique investment product launched by the National Spot Exchange Limited (NSEL) for the first time in the history of Indian commodities market. The product enables you to buy gold in an electronic form on the National Spot Exchanges' trading platform and the gold you buy will reflect in your demat account.

    The biggest advantage is that E-Gold allows you to buy gold in smaller denomination such as 1, 2, 3...grams. One unit of E-gold is equal to one gram of gold. Thereby, offering liquidity. Additional benefit of investing in E-gold is physical delivery of gold at the time of settlement. Further, there are no storage or holding costs involved.

    The transacting pattern of this product is similar to the cash segment of the equity markets, where the E-Gold you buy will be settled on a T+2 basis (i.e. Trading day + 2 days). Meaning if you buy E-Gold today, it will be reflected (credited) in your demat account two days from the date of purchase. Similarly, if you have sold today, it reflects (debited) in your demat account two days from the date of sale.

    However, in order to transact in E-Gold, you need to open a demat account with any of the Depository Participants (DPs) empanelled with NSEL. And such DPs are Global Capitals, Religare, Karvy, Goldmine, IL&FS, Monarch Capital, SMC, and SSD securities.

To Conclude:

Buying the yellow metal in paper form has many advantages that are missed when you buy gold in a physical form.

Holding gold in non-physical form will provide relief to you in terms of the security aspects which typically associated with holding physical gold. Another big advantage is that you do not have to worry about the quality of the gold. Transacting in Gold ETFs is at the prevailing market rate, while for a gold fund, it is at the NAV. Thus, there is no question of you shelling out more to fill the pockets of anyone who is selling gold - be it a gold merchant or banks.

Gold is essentially an asset that allows you to counterbalance the risk of other asset classes. But avoid a speculative approach while investing in gold. Look at it as a portfolio diversifier and a monetary asset (rather than a mere commodity). Remember, gold can reduce the overall risk in your portfolio, especially in times of uncertainties. The current geo-political crisis and economic uncertainties will instil a fear induced demand for this precious metal, as smart investors take refuge.

Currently there are compelling reasons to invest in gold...

  • Geopolitical tensions have amplified (North Korea continues to test bombs and missiles into the Pacific Ocean. It even test fired a missile over Japan. India too encounters a state of worry and urgency from Chinese troops at the border, the Naga insurgents along the India-Myanmar border, and the situation in the J&K valley is volatile);
  • There are doubts about the Donald Trump's untested policies;
  • The Federal Reserve has refrained from hike interest rates aggressively;
  • The Brexit process is underway;
  • China's macroeconomic indicators are wobbly;
  • India's economic growth rate is dwindling after demonetisation and shoddy implementation of GST;
  • Inflation is inching up yet again; and
  • India may breach fiscal deficit targets
  • Recognising the systemic risk involved, even then central banks across the globe aren't taking any chances. Most have increased their gold reserves, while many others are maintaining their positions.

    Therefore, rather than to accelerate profits, you should treat gold as a diversifier asset. And ideally, invest in gold with a longer investment horizon.

    PersonalFN advises you to be smart investor. Allocate at least 10%-15% of your entire portfolio to gold and holding it with a long-term investment horizon --this will prove to be prudent strategy.

    Watch this video to learn how to smarty invest in gold.

    Happy investing!

    This article first appeared on PersonalFN here.

    PersonalFN is a Mumbai based personal finance firm offering Financial Planning and Mutual Fund Research services.


    The views mentioned above are of the author only. Data and charts, if used, in the article have been sourced from available information and have not been authenticated by any statutory authority. The author and Equitymaster do not claim it to be accurate nor accept any responsibility for the same. The views constitute only the opinions and do not constitute any guidelines or recommendation on any course of action to be followed by the reader. Please read the detailed Terms of Use of the web site.

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