Gold in physical form as jewellery is traditionally bought for wearing and also as a means for dealing with financial emergencies. Buying gold has traditionally been a financial support system over the years.
In the present world rather than the conventional way of buying physical gold there are other ways of owning gold too. The most common means for buying physical gold are as jewelry, through gold coin scheme or gold savings scheme.
The other common ways of owning gold in a non physical forms (paper gold) are
1. Gold exchange traded funds (ETFs)
2. Sovereign gold bonds (SGBs).
3. Gold mutual funds (fund of funds) which further invest in gold ETFs. 4. Gold Funds which invest in the shares of gold mining companies.
PAPER GOLD
Gold exchange traded funds (ETF)
Gold ETF's are an alternate way of owning paper gold in a more cost-effective manner . They have gold as underlying asset and they can be traded in stock exchange (NSE or BSE). The high initial buying and even selling charges that go into owning jewellery, bars or coins gives an extra edge to the low-cost gold ETF. The transparency in pricing is another advantage. The price at which it is bought is probably the closest to the actual price of gold and therefore the benchmark is the physical gold price.
What you need is a trading account with a stock broker and a demat account. One may either buy in lump sum or even at regular intervals through systematic investment plans (SIP). You may even buy 1 gram of gold. ETS's are open for NRI's also.
Sovereign Gold Bonds (SGB) Sovereign Gold Bond is another way of owning paper gold. They are issued by the government but availability is not 'on-tap basis'. Instead, the government will intermittently open a window for the fresh sale of SGBs to investors. This could typically happen every 2-3 months and the window will remain open for about a week maximum. For investors looking to purchase SGBs anytime in between the only way out is to buy earlier issues (at market value) which are listed in the secondary market.
In addition to the profits which can be gained from the increase in gold prices SGB's usually give a 2.5 % annual interest (based on RBI's notification) which is tax free as of now. But SGB's come with a tenure of 8 years in most cases and can be exited only after 5 years in general. However this is open for resident Indians only and investment can be as low as 1gm with a maximum of 4 kg per individual in most cases. The capital gains tax arising on redemption of SGB to an individual has been exempted.
Gold mutual funds
Gold mutual funds are open-ended investments with Gold Exchange Traded Funds as underlying assets. As the underlying asset is held in the form of physical gold, its value is directly dependent on the price of this precious metal.
These funds can also be used as a hedge to protect an investor against economic shock. Many individuals diversify their investment portfolio with 10% to 20% investment into gold funds as a means to secure themselves from the fluctuating market.
Some golf mutual funds invest 10% in debt instruments, so in addition to the return from ETF's this could give dividend also. These are open to NRI's also.
Gold Funds
Gold funds are a type of mutual funds that directly or indirectly invest in gold reserves. Investments are usually made on stocks of gold producing and distributing syndicates, physical gold, and on stocks of mining companies. It is a convenient way to invest in an asset without having to purchase the commodity in its physical form. NRI's can also invest in Gold MF's
Key Takeaways
1. The initial cost of owning physical gold in the form of bars or coins is anywhere around 10 percent and it is even higher for jewellery. Paper-gold, are cost effective means of investing n Gold.
2. SGB (Sovereign Gold Bonds) benefit those who want to invest in gold for a longer period as its maturity is after 8 years, although the lock-in ends from the fifth year.
3. On the other hand gold ETF provides much better liquidity than SGB.
4. Gold Mutual Funds or Gold Funds are also attractive investment options and primarily could be used to diversify the portfolio to take advantage of medium to long term price growth in the yellow metal.
5. The big difference is on the taxation front is that Gains in SGB on redemption are tax-exempt but gains in Gold ETFs after 3 years are subject to 20 percent tax post indexation.
6. The only disadvantage with gold ETFs is that its units won't be earn the additional interest of 2.5 per cent per annum like you would get for SGBs.How to make a choice?
Now to decide on which one suiting need to have clarity as to why you need to invest in gold - is it for marriage purpose or for pure investment.
For investments, one should not have more than 10 percent of the total portfolio in gold. Choose between Gold ETFs or SGBs depending on how comfortable you are managing investments online and keep the worries of purity, security aside.
If you wish to play it a but more safe Golf Mutual Funds/Gold Funds can be considered and could give you reasonable returns from gold price as and also take advantage of long term price increase of the precious yellow metal.
For knowing more on the possibilities of diversifying your investments please do ping me.
Cheers,
Sreekanth
0503963193
sreekanth.pillai@cfsgroup.com
www.finplanuae.com
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