6 ways to invest in Gold

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Gold Jewellery

This is the most common form in which gold is bought in India because most Indians love to flaunt it. The biggest advantage of buying jewellery is that you can enjoy the gold you own even as it continues to gain in value.

However, there are disadvantages as well. Firstly, you have to pay very high making charges, especially if you go for exotic designs.

"The making charges vary according to design, but on an average, it will be around Rs 200 per gram," says Hasmukh Bafna, president of the Mumbai-based Gold Jewellery Wholesalers Welfare Association. Considering the prevailing price of 22 carat gold that is used in jewellery, this works out to be a 10% mark-up. Note that investors will never be able to recover these costs if they decide to sell the jewellery.

The purity of gold is another problem that one encounters in case of jewellery. Most of the time, it may not be of the level that is being claimed. Though this problem has receded due to the widespread use of 'hallmarking', it has not been resolved completely. "Since the hallmarking services test only a fraction of the gold jewellery submitted for testing, there are concerns with the hallmarked jewellery as well," says Bafna. Besides, the hallmark certification adds to the cost of the gold.

The third problem is that though most jewellers are ready to exchange the gold sold by them at market rate, very few are willing to pay in cash. Most of them deduct 5-10% of the value if you want hard cash. The deduction is higher if you try to sell gold that has been bought from some other jeweller. This is because he will question the gold's purity, claiming it to be supect, and pay you less

NOTE : Go for it if you want to start using the ornaments immediately or give them as a gift. If the expected use is, say, after 10-15 years, it is safer to keep accumulating the precious metal in paper form and then liquidate the holdings at the time of marriage to buy gold jewellery. This is because fashions change with time and if you try to exchange the jewellery, you may find that your returns have been pared due to high making charges, tax implications and impurity issues.

Bars, coins & biscuits

Bars and coins are the next most common form of gold bought in India. You can purchase these from any jeweller or bullion trader. In the past few years, banks have started retailing 24-carat gold biscuits.

The big draw of this form of gold is that you are buying it in its purest form. Further, most of the gold biscuits and coins come in tamper-proof covers. If the investor keep the covers intact, gold will not only be readily purchased when he goes to sell it, but it is also likely to fetch a higher value than if the cover was open.

However, this advantage comes at a price. Though there should not be any making charge for gold bars and coins, they are usually sold at a price higher than the prevailing gold rate. This difference is the bank's profit for this facility. Further, while the banks will readily sell you the gold, they won't buy it back. Banks cite the RBI regulations, which prevent them from trading in gold. You need to approach a jeweller or bullion trader if you want to sell the gold back.

Also, since it cannot be worn, there is little purpose in keeping bars and coins at home. If you don't already have a bank locker, your cost of storage will go up.

NOTE: Go for it if you don't have any faith in paper gold and want to purchase only physical gold. But it's best to go for bars and coins from a reputed jeweller, who will buy them back when you need the money.

Gold ETFs and fund of funds

Since their launch a few years ago, gold ETFs have emerged as a highly popular investment avenue among retail investors. In the past 12 months, the AUM of gold ETFs has grown three times-from Rs 1,590 crore in March 2010 to Rs 4,440 crore in March 2011.

Gold ETF units, which are equivalent to 1 gram of gold, are held electronically in the demat form and traded on exchanges. They offer investors the triple benefits of security, convenience and liquidity. Investors also don't have to worry about the purity of gold as these funds are required to hold equivalent quantity of standard gold bullion of 99.5% purity.

Unlike physical gold, investors are assured of transparency in pricing as there are no making charges or premium involved and units are traded on the exchange. Investors can liquidate their holdings quickly at prevailing market prices.

Since these products are regulated by Sebi, the risk is lower. Also, income from gold ETFs is treated as long-term capital gains and taxed at a lower rate if the holding period exceeds one year compared with three years in case of physical gold. Physical gold also attracts wealth tax.

However, you need a broking account and a demat account to invest in gold ETFs. This costs up to Rs 500 a year. There are also fund management fees (1% per year) and brokerage costs for each transaction (0.25-0.5%). Gold ETFs also don't mimic gold prices accurately as they have to keep some part of the corpus aside in cash or liquid funds.

Some funds have now launched gold fund of funds (FoF) schemes, which invest in gold ETFs so that you don't need to have a demat account. This avenue offers investors the convenience of investing through the SIP route. But this comes at a cost. FoFs usually charge a 1-2% exit load if the investment is redeemed within a year. More importantly, these carry an additional expense ratio of 1.5%, which is over and above the 1% charged on the ETFs in their portfolio. For the investor, the total cost adds up to 2.5% a year.

NOTE: Go for it if you already have a stock market trading account and a demat account. They can use the same infrastructure to invest in gold. Investors should focus on gold ETFs, which boast good volumes on the exchanges. Also, avoid gold ETFs that hold large amounts in cash. This is because they will not mirror the rise in gold prices.

E-gold

This is the new kid on the bullion block. Offered by the National Spot Exchange Limited (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.

E-gold offers better liquidity than most gold ETFs and the pricing is also transparent. Besides, this is the only form of paper gold that allows conversion to physical gold, or rematerialisation. Of course, this will involve remat charges (`200 per 10 gram of gold), and VAT of around 1%.

Atul Shah, head of commodities at Emkay Commotrade, says, "Investors would be better off with e-gold as it not only offers liquidity but also carries lower costs. They can also get the advantage of the movement in gold prices after the close of market hours. Since gold ETFs are not traded in the evening, investors lose the opportunity arising from any overnight movement in global prices."

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, although annual maintenance charges have been waived for now. Opening a separate demat account is also a botheration.

Consider buying e-gold if you wish to make use of the longer trading hours of NSEL. The benefit of long-term capital gains tax is only available after three years, unlike gold ETFs and gold FoF, where the same is available after one year. Also, as with physical gold, investors would be liable to pay wealth tax at 1% in case the total taxable wealth exceeds Rs 30 lakh.

NOTE: Go for it if you wish to make use of the longer trading hours of NSEL since opening another demat account can be a botheration.

Stocks

If you are bullish on gold, why not invest in a gold mining company? Since there are no good gold mining companies listed in India, you will have to scout for those that are listed abroad. You could also invest in funds that invest in such companies.

As of now, there are only two options-AIG World Gold Fund and DSP BlackRock World Gold Fund.

These funds are different from other FoF schemes in that their underlying funds invest mainly in stocks of gold mining companies across the globe. By investing in the stocks of these companies, these schemes give investors the chance to participate in the rise in gold prices and the resulting profitability of gold mining companies.

Apart from gold, the DSP BlackRock World Gold Fund also has some exposure to silver, platinum and other metals, thereby providing diversification to some extent. Other benefits mentioned earlier for mutual funds (capital gains tax after a year, no wealth tax, etc) are applicable for these FoFs as well.

The main disadvantage here is that gold prices and the stock prices of gold mining companies will not rise in tandem. This is because the equity prices are affected by several other factors as well. Also, keep in mind that these funds invest in international equities and, therefore, any sustained appreciation in the rupee against the dollar would pare the returns for the investor.

NOTE: Go for it if you are willing to take risks and understand that gold prices and shares of gold mines don't always move together. Flooding of gold mines may push gold prices up but send the stocks reeling.

Gold futures

Investors with a slightly higher risk appetite have another route to gain exposure to the yellow metal-gold futures. Commodity exchanges like MCX and NCDEX allow investors to take trading positions in gold through a futures contract.

Essentially, 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.

Gold futures offers the scope of making big money as these are leveraged positions. Investors do not have to put up the entire amount at the time of entering the contract. Instead, they are required to keep a margin money of 5% with the broker and, depending on notional gains or losses made by the investor on a daily basis, he is required to put up additional money to maintain the required margin.

By taking a short position, an investor can also make money even if he thinks that gold prices will fall in the future.

While trading in gold futures offers a significant upside, there is an equal chance of incurring huge losses. Under futures trading, risks are magnified and, if your calculations go awry even a little, it could lead to large losses in your portfolio.

As such this route is ideal only for traders and speculators who have a high appetite for risk. Vivek Rege of VR Wealth Advisors suggests lay investors to stay away from this option. "A normal investor should not get into this risky product as the losses can be exponentially high," he says.

Also, the investor would have to offset his position before the maturity of the contract, otherwise he would have to deal with delivery of physical gold. This involves several hassles in terms of cost as well as need for accreditation.

NOTE: Go for it if you already have a position in gold, that is, either in the physical form or the demat form. This is because gold futures are meant for hedging. The retail investors, who want to buy gold for the long term, should avoid this risky path.

Source: Economic Times

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