Gold Investment – Here’s how You go about Investing in Gold
Here’s what you need to know after realizing that you need Gold Investment. Before investing in gold – paper or physical – look at the charges, lock-in period, convenience and returns.
We are a gold obsessed country. According to a recent World Gold Council report, it was India’s gold demand that supported the global demand in the first quarter of 2017. While global jewellery demand rose just 1% year-on-year from 474.4 tonnes in the first quarter of 2016 to 480.9 tonnes in the same period of 2017, India’s jewellery demand was up 16% to 92.3 tonnes. Indian households have been buying gold in the form of jewellery. But in the first quarter of 2017, demand for coins and bars also grew 14% year-on-year from 27.5 tonnes to 31.2 tonnes. “This quarter, we have seen growth in both jewellery and investment instruments, but it was on a small base because in Q1 2016, we lost one month due to (jewellers’) strike, implementation of 1% excise duty and hold-back in purchases due to price rise,” said Somasundaram P.R., managing director (India), World Gold Council. If you plan on investing in gold, there are many options. Mint Money decodes the major gold products so that you can see what suits you best.
Sovereign gold bonds
Sovereign gold bonds, first introduced in 2015, are government securities issued in the units of grams and available in paper or demat form. The bonds are issued by the Reserve Bank of India (RBI) on behalf of the government. The bond’s nominal value is based on the simple average closing price in the week preceding the subscription period, published by the India Bullion and Jewellers Association Ltd. The bonds are issued in tranches. The first series for this financial year was issued in April. The bond was priced at Rs2,901 per gram, which included a Rs50 per gram discount. Minimum investment is 1 gram and maximum, 500 gram, per financial year. This tranche gives an interest of 2.5% per annum on the initial investment, which will be paid half-yearly. The total tenure is 8 years but you can withdraw prematurely after 5 years. In the recent issue, capital gains tax was exempted for individuals but the interest will be taxed. When an issue opens, you can buy it at a bank, designated post offices or stock exchanges. There are no additional charges for holding them.
Before sovereign gold bonds entered the market, gold exchange-traded funds (ETFs) existed as the paper gold product. Launched in 2007, gold ETFs give returns in line with the change in gold prices. Each unit is backed by 24-carat gold of 99.5% purity. To buy gold ETFs, you need to open a demat account. Gold ETFs track domestic price of gold and usually each unit of ETF is equivalent of 1 gram gold. The underlying asset is physical gold and some cash left for adjustment. Charges are in the form of expense ratio—mostly 0.9-1%. Returns on gold ETFs are the value minus the expense ratio. So, if the value of the ETF is up 10% and the expense ratio is 1%, your returns will be 9%. You will also need to factor in the brokerage cost of opening a demat account, and taxes. Unlike sovereign gold bonds, there is no cap on the amount for investing in gold ETFs.
Gold mutual funds
Not everyone has a demat account to buy gold ETFs. So, asset management companies (AMCs) launched gold mutual funds. With this you can invest in paper gold without a demat account. The money is invested in the fund house’s gold ETF. You can invest in fractions; for example, you can invest an amount that’s worth 12.8 gram. “In gold mutual funds, you can do fractional holding, which is not possible with gold ETFs. It gives you the flexibility to invest through SIP (systematic investment plan) or in lump sum, but remember that the expense ratio is higher,” said Srikanth Meenakshi, co-founder, FundsIndia.
Charges are in the form of expense ratio. “Gold funds will add the gold ETF expense ratio as well,” said Lakshmi Iyer, chief investment officer (debt) and head-products, Kotak Asset Management Co. Ltd. For instance, the expense ratio of Canara Robeco’s gold fund is 0.76% and the gold ETF’s is 1%. Since the mutual fund invests in the gold ETF, you end up with an expense ratio of 1.76% in this case. There are no other costs attached to gold mutual funds. AMCs also offer some schemes that invest in shares of gold mining companies.
Gold coins and bars
Gold bars and coins are sold at jewellery stores, banks, online portals and even by a fintech company. If you buy from a bank, you can’t sell it back to them. The unit size varies. For example, according to the State Bank of India website, you can buy gold coins of 2, 4, 5, 8, and 10 grams, while 20 and 50 gram are in the form of bars. With Bank of India, the lowest denomination is 4 gram.
Prices are based on the day’s gold price, and are usually displayed on the bank’s website. While buying coins and bars, check for purity. You also have to pay value added tax, sales tax and, in some cases, making charges. Also remember that the sell price will be lower than the buy price.
With investing in gold jewellery, besides the cost of gold, consider making charges, charges on stones, if any, purity and buyback offer. To check purity, look for hallmarking, which tells you the official proportion of the metal. You also need to look for caratage. For instance, 22K means 91.6% purity (percentage of gold content) or 916. Making charges are usually a percentage (6-25%) of the cost of gold, and you can bargain. With stone-studded jewellery, it is difficult to check the purity. Also, at the time of selling, you will have to let go of the making charges and the cost of semi-precious stones.
What should you do?
Gold as a product is a long-term hedge against inflation. If you plan to buy gold for investment, keep four things in mind. One, any gold-related investment comes with the risk of capital loss if the market price of gold declines. Two, only if you are looking to diversify your overall portfolio is an exposure of 5-10% of investing in gold recommended. Three, compare the pricing, costs, service and returns of the instruments. Four, know the reason for buying gold—self-consumption or investment purposes. For instance, jewellery is the worst way of investing in gold since you will incur a loss in the form of making charges and taxes.
When it comes to selecting a gold investment option, sovereign gold bonds bode well, followed by gold ETFs. “If you are looking to invest for a longer duration and don’t mind the lock-in period, sovereign gold bond will work because you also earn an interest. But if you want liquidity, you may want to consider investing in gold ETF,” said Surya Bhatia, a New-Delhi based financial planner. Do remember that gold mutual funds are more expensive than gold ETFs due to higher expense ratio. “The benefit is that one can do SIPs or STPs (systematic transfer plans) with the benefit of rupee cost averaging, and without a demat account. We recommend sovereign gold bonds as the best option currently, followed by gold ETFs,” said Vishal Dhawan, a Mumbai-based financial planner.
The government has also introduced the Gold Monetization Scheme, which allows you to earn interest on the gold that you own by depositing it with a bank. – Vivina Vishwanathan
Please check back for new articles and updates at Commoditytrademantra.com