Gold has been one of the most impressive asset classes over the last few years. The extraordinary return of above 20% generated during this period has attracted investors from all segments. Although Indians consume gold more for sentimental reasons, the current volatility in equity markets and a phenomenal rise in gold prices have seen investors vying for their share of returns.
5. Gold Funds
Gold is one asset class which is consumed in many forms. But each one is suited in different scenarios. For instance, a simple gold bar is different from jewellery and investing through gold ETF has its own advantage. "At times it's difficult for an investor to make a choice. So before making any investment decision, you need to analyze your requirements and then weigh the various options of investing in this asset class to identify which one will match your objective," says Jitendra P.S. Solanki, a SEBI-registered investment adviser and founder of JS Financial Advisors.
Here we take a look at the different options of investing in gold and also when should they be considered:
1. Jewellery
Traditionally Indians like flaunting this assets and that's one of the reasons why gold is so popular here. But buying gold in the form of jewellery has its own costs involved. The primary one is the making charges, which can be to the tune of 10%. There are costs associated even when you sell jewelry, especially when it is to a different jeweler. More than that the change in designs and other factors over the time does not hold good for investing though this mean in the long term. It may be a viable option if it's for immediate use or it has to be gifted. If you are looking at holding the asset for a very long term, other options will be more cost effective and liquid.
2. Bar, Coin or Biscuit
Gold bar is one of the oldest forms of preserving gold. There is less cost involved than buying gold in the form of jewellery. Where you incur higher charges is the preservation of the physical asset when you have to keep it in a safe custody. Most banks and financial institutions are selling gold coins. In fact, it has become a most lucrative form of gifting during festival or promotions. But the price of buying a gold coin is higher than the market rate so that the institution selling it can earn profit. Also, banks only sell it and are not allowed to trade by the regulator. So, "if you do buy a gold coin, you will have to sell it to a jeweler only who will deduct charges then. With all these costs involved, holding gold physically will not be cost effective. Knowingly if you decide to invest through these means, buy it from a reputed jeweler as there is always a purity issue. This will also help you avoid the cost during selling it when in need," says Solanki.
3. Gold ETF
Exchange Traded Funds (ETF) have been gaining slow acceptance in India and gold ETF has emerged as one of the favorite investments. This is primarily due to a few reasons. Firstly, these are traded on a stock exchange providing high liquidity to investors. Every unit of ETF is equivalent to 1 gram of gold. Secondly, investors do not have to bear high cost unlike physical gold and the underline gold held by institution is also of high purity. Thirdly, the gains are treated as long term after one year and there is no wealth tax like in physical gold. However, one need to manage a demat and trading account to invest through ETF. Also, there are expenses within the fund (.5-1%) which one need to be aware of. The ease of investing and high liquidity are the main drivers for attraction towards gold ETF. Overall investing through ETF is the most viable option when you want to take exposure in gold.
4. E-Gold
After the NSEL fiasco, e-gold has lost its sheen. They were similar to gold ETF with a major difference that e-gold is traded up to 11.45 a.m. This provides much higher liquidity than gold ETF. Also, it's the only option where units can be converted to physical gold and unlike ETF, there is no difference in prices. "But the long-term capital gains arise after 3 years and wealth tax is applicable. Also, opening a separate demat and trading account may be cumbersome for some people. Have been a good option only if you don't mind operating extra demat account. Moreover, after the NSEL scam, it will take time for e-gold to gain interest," says Solanki.
Unlike gold ETF, gold mutual fund schemes are not traded on any exchange. These are identical to mutual fund schemes which a common man is conversant with. There are two categories of gold funds -- Gold Fund of Fund and Gold Funds. An FOF invests in gold ETF while gold funds invest in mining companies. Although these have easier option to invest, gold FOF have higher expenses and gold funds have higher risk associated as they invest in stocks. One needs to be aware of these factors before availing this option.
Whatever be the case, gold is an ideal investment avenue to hedge inflation. But you should not invest in gold only based on the past performance of any option, as there is no guarantee of the repetition of that performance again. Therefore, look at the long-term results and expect reasonable returns from the avenue in alignment with your objectives. Before availing any option, you should look at your requirements and then decide. From financial planning perspective, however, keep the exposure in gold within certain limits.
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