Gold As an Investment in India


As Indians we're passionate about gold. We are the world's second largest consumer of the yellow metal after the Chinese. But unlike others most of us buy gold as a social imperative - for a family wedding, for the dowry, for a festival, and so on. Historically gold has worked as a hedge against inflation. In times when the economic outlook is unstable people and governments try to hoard it in their treasury. So far in the recent past, with turmoil in the global economy gold prices have witnessed tremendous hikes and corrections too. Instead of joining the speculation of where gold prices will go from here, we make a simplifying assumption - that you buy gold regularly in small quantities irrespective of the price. This makes sense whether you intend to splurge at a wedding, or keep it purely as an investment. Unlike other commodities the price of gold depends upon the demand for it than its supply because there is more gold with people or governments than there are reserves under the earth. As an investment gold can make you richer as it appreciates with time. Holding it does not pay interest or dividend.

Any investor must not have 5-10% of their total assets as gold.

Let's see the best way to buy and hold the beautiful yellow metal.

Physical Gold

Jewelry

If you are actually going to use gold as jewelry, nothing is better than buying it in that form. The making charges and jeweler's profits are worth paying for, if you are getting the chain or earring you have always desired. But there is eminent wisdom in buying gold as an investment too, to about 5%-10% of your total assets. Let's look at four ways to invest in gold, starting from the worst to the wisest way.

Bars, Coins

The first people in the gold selling business are the Banks, with their gold coins and biscuits. They have special offers on Akshaya Tritiya, Dhanteras and other festive days. Not surprisingly, this is probably the most expensive way for you. Banks charge no less than 8% charges on the prevailing price. You then have to spend on a locker to keep it safe. Worse, they don't take the gold back; so should you wish to sell, you would need to run from pillar to post trying to get a good rate from a jeweler. Some of them may refuse to buy coins sold by others and may demand making charges.

SBI Gold Deposit Scheme

If you have too many gold bars, coins lying with you they can be deposited with the SBI under its Gold Deposit Scheme (GDS) for 3,4 or 5 years and earn an interest of up to 1% per annum. The interest may not be attractive but you can get exemption on wealth tax and capital gains tax. The interest earned is tax-free too. You can deposit ornaments if you're willing to have them melted into uniform bars. When you want to take back your deposits their weight may be lesser than what you deposited because they undergo purification and refining to bring them to uniformity in the government's mint.

Gold Mutual Funds

If you do not have DP or trading accounts a good way to invest in gold is through Gold Mutual Funds. Gold MFs are fund of funds (FoF) that invest in Gold ETFs. There are gold-related funds such as the DSP BlackRock World Gold Fund, AIG World Gold Fund, Reliance Gold Savings Fund, Kotak Gold Fund, UTI Master Gold Fund, to name some. For a fee of only about 2% a year, you can invest in these funds, which buy and hold gold on your behalf. Here the prices move faster and further in both directions than the price of gold. An FoF is a fund that invests in other funds and the cost of investing in it is higher than investing in the constituent funds individually. A great advantage with Gold MF is that you are not compelled to buy complete units unlike in an ETF. So if you have Rs 20,000 to invest in gold you can buy units in a Gold MF but it would be insufficient for a unit of gold in an ETF. You have the option of systematic investment too so you can buy for as little as Rs 100 every month. SIPs are a good way to accumulate gold as an investment. Best of all, you can redeem them at a day's notice, at the prevailing market price (NAV). Gold mutual funds have not performed better than gold ETFs.

Gold ETFs

If you have DP and trading account, gold Exchange Traded Fund (ETF) is the better way to buy. They perfectly track the price of gold, and cost less than 1% a year. Currently there are 11 ETFs listed in the NSE/BSE. They are listed below in the order of their listing dates with the oldest one first:

Gold Benchmark Exchange Traded Scheme

UTI Gold ETF

Kotak Gold ETF

Reliance Gold ETF

Quantum Gold Fund

SBI Gold ETF