How to Invest in Gold in India?

 

What is the best way to invest in gold in India? What are all the different ways to invest in gold? How can I / we invest in gold? What are all the various gold investment options available to Indian Investors?

 

Let us discuss in detail about how to buy gold for investment purpose.

 

Gold as an Investment Option

 

Before proceeding further let us answer a basic question in our mind. Why to invest in gold? Should I invest in gold? Is gold a good investment option?

 

It is your hard earned money. So you need to answer these questions before investing in gold. Why do people invest in Gold? What are all the benefits of investing in gold?

 

There are 2 primary reasons why you need to invest in gold.

 

·        Investing money in gold is worth because it is a hedge against inflation. Over a period of time, the return on gold investment is in line with the rate of inflation.

 

·        It is worth investing in gold for a one more very valid reason. That is gold is negatively correlated to equity investments. Say for example 2007 onwards, the equity markets started performing poorly whereas the gold has performed well. So having gold as an investment option in your portfolio mix will help you reduce the overall volatility of your portfolio.

 

The above 2 points could have given some answers to your question “Is buying gold a good investment?”

 

Return on Gold Investment

 

Is it profitable to invest in gold?

 

This investment proved remarkable from 2006 to 2011.During that time span Gold has given average return of 29% per annum which was any day better than other investment options.

 

However, the long term average return on gold investment is less than 10% p.a.

 

As one can say technically or ironically but history always repeats itself. Therefore, we may once again observe the similar less than 10% appreciation pattern in gold prices in near future.

 

Still, if you want to invest in Gold and cannot resist yourself from the temptation then these are few tips on how to invest in gold correctly!

 

1)    Jewellery buying

 

Our age-old and traditional way of investment is jewellery buying where one can buy gold ornaments, bars or coins. However, it has its own disadvantages, total buying cost involves heavy making charges (it can be 10 to 20% of total cost).However, when you try to sell the same piece to same jeweler, he will buy it below market rates and deduct those making charges from the total price of your jewel.

 

2)    Investment in Gold coins and bars

 

Investment in gold coins and bars is also a better option over jewel buying. You need to decide on ‘Where to buy gold coins or bars?”. You should buy gold bars and coins only from jeweler. Banks also sell gold coins or bars. Then why do we advocate for buying god bars and coins from jewelers? To answer this question you ask yourself “How to sell gold coins or bars?” or “Where to sell gold coins in India?”

 

Banks sell gold coins and bars, but they cannot buy it back. Whereas, the jewelers can buy back the gold coins from you.

 

How to invest in Physical Gold? The point 1) and 2) could have proved that it is better to invest in the physical gold by way of gold coins or bars sold by the jewelers. In the next points 3) and 4) we will discuss about the paper gold investment options in India.

 

3)    Gold ETF:

 

What is Gold Exchange Traded Fund? Gold exchange traded fund is a type of mutual fund which in turn invests in gold and the units of this mutual fund scheme is listed in the stock exchange.

 

How to invest in Gold ETFs in India? You need to buy Gold ETFs from the stock exchange by way of opening a demat account and trading account. You have to pay brokerage fee (which is generally between 0.25% to 0.5%) for buying and selling of these Gold ETFs. You will have to further pay 0.5 to 1 % charges as fund management charges.  

 

 

4)    Gold Fund of Funds:

 

What is Gold Fund? Gold fund is a Fund of Fund which will invest in Gold ETFs on behalf of you. Best part here is that you do not require holding any demat a/c here. 

 

Then how to invest in Gold Mutual Funds? Just like investing in other mutual fund schemes. As this is like any other mutual fund scheme, SIP investment in gold is possible through these gold funds.

 

Still buying Gold fund of fund is little expensive option, as you have to pay

1) Annual management charges for the underlying Gold ETF

2) Annual management charges of Gold FOF Scheme .

 

Gold ETFs Vs Gold Mutual Funds

 

With Gold ETFs, you need to open demat account and pay broking charges. With Gold Mutual Funds, you need to bear the additional charges charged by the Gold Fund of Fund.

 

If you are buying in less quantity then gold mutual funds may be suitable. If you are buying in more quantity then you can negotiate for the lesser brokerage charges from your stock broker, hence gold ETF may be suitable.

 

 

5)    Equity based Gold Funds:

 

Here these funds are directly not investing in Gold but investing in the companies, which are related to the mining, extracting and marketing of the Gold. Besides, its performance is purely dependent upon the performance of the fund house and the equities they are investing.

 

In the other 4 options, your investment performance will be directly linked to the price movement in gold.

 

However, investment in these funds is suitable for investors with high-risk appetite.

 

·        As these are equity-based funds, equity risk is there.

·        There are no listed companies in India associated with Gold. Therefore, these funds trade in international market and quiet susceptible to currency-risk apart from gold-risk and equity based risk.

 

Therefore after assessing or weighing pros and cons of each gold investment option, one can conclude that Gold ETFs and Gold Funds are safest, profitable and most preferred options among the various alternatives.

 

How much to invest in Gold?

 

5% to 10% of your over assets can be invested in gold. If you invest more in gold, remember in the long term return on gold investment is less than 10% p.a.

 

Is it right time to invest in gold?

 

Many times I have faced questions similar to “When to invest in gold?” or “Should I invest in gold now?” There is no right or wrong time to invest in gold. You need to invest in gold for long term ( 5+yrs). It is better to stagger your investments over a period of time to average out the cost of purchase.

 

How to start investing in Gold online?

 

You can start investing in gold online either by investing in gold ETF or by investing in gold funds. Gold funds can also be bought online just like investing in other mutual funds online.

 

The above compilation on different methods of investing in gold could have given you more clarity about investing in gold. Clarity is power when comes to taking investment decisions.

 

The author is Ramalingam K, CFP CM is the Chief Financial Planner at holisticinvestment.in, a leading Financial Planning and Wealth Management company. 

 

Gold Exchange-Traded Fund (ETF)

A Study on Physical Gold and Gold ETF

Stock Market has lead to tendency of many to go in for much safer investments that gives a reasonable return. This is the reason for gold gaining popularity as one of the safest avenues for investment.

Gold has always held importance as a good investment proposition since the days of our ancestors. But the recent trends of daylight robbery, murders and greed for the precious yellow metal with the difficulty of storage and safety of physical gold had made gold a cumbersome proposition. In addition, fraudulent and not uniform practices followed by jewelers and difficulty in establishing the purity of gold contributed to the popularity and desirability of gold ETF’s.

Gold ETF’s or gold exchange-traded funds are instruments investing in gold of 99.5% purity. Investing and maintaining these funds just required demat account and a trading account with a registered stockbroker. Gold ETF’s are more ideal than physical gold due the following reasons: 

¨     Gold ETF’s are investments in gold of 99.5% purity only. It prevents one from falling into the clutches of some jewelers that fool customers with smooth and artistic talk. This avoids chances of misplacement of trust, as only a goldsmith could find out the exact purity.

¨     Owning something virtual like gold ETF’s does away with the difficulty of storage and security experienced in possessing physical gold. The units of gold ETF’s can easily be stored in both demat and trading account without being known to the greedy, cheaters, robbers and looters. A word of caution here, you could be sure of it all when you keep your units in accounts with privacy of user name and password.

¨     Gold ETF’s are most ideal for small investors as they can be purchased in small denominations sometimes of even 1 gram or ½ a gram. So ETF’s can be bought easily in small installments regularly and increased in the virtual form. This advantage is not available when investing in physical gold.

¨     Low cost, with affordability in dealing with gold ETF’s contributes to their desirability over physical gold. These instruments are listed in exchanges; the exchange traded mechanism helping to reduce processing charges, disbursements and collection charges. Gold ETF’s also help do away with the carry charges in gold futures.

¨     The ease to convert gold ETF’s into liquid cash easily at real time prices on the stock exchange avoiding charges like commission, and unnecessary fuss over quality and price by jewelers make them a desirable investment. This makes buying and selling these units easy.  

¨     Right and uniform pricing in Gold ETF’s offered no scope for price discrimination that is experienced in encasing physical gold at the jewelers. One lacking knowledge and experience in dealing in gold would do best to invest in good gold ETF’s.

¨     Gold ETF’s offer protection from the liability of taxes. The taxation system for gold ETF’s is similar to non-equity mutual funds. One only needs to pay the lower of the two, long-term capital gains tax of 10 per cent without indexation or 20 per cent with indexation on profits made.

¨     Gold GTF’s are likely to show lesser tracking errors as compared to normal funds as the creation and redemption of units are done with units of the same type. This accounts for lesser liquid cash being required and the short time interval between buying and selling of units.

However some may disagree with me and say that the psychological satisfaction of seeing and feeling physical gold in the physical form is important and gold ETF’s are a fictitious concept. It is purely a question of ones own perception, but I would strongly contest gold ETFs if investment, safety and security is ones objective.

If you keep gold in the form of ETF, you will not have any emotional attachment towards that. You will really consider it as an investment. If you need money for buying a property or kid’s higher education you will feel free to encash it. But in the case of physical gold, we will not be prepared to sell it because we will have emotional attachment towards physical gold.

So, Gold ETFs are the better way to invest in gold.

The author is Ramalingam K, an MBA (Finance) and Certified Financial Planner. He is the Founder and Director of Holistic Investment Planners (www.holisticinvestment.in) a firm that offers Financial Planning and Wealth Management. He can be reached at ramalingam@holisticinvestment.in.