Investing in Gold
Indians are among the largest retail buyers of gold in the world. And the biggest hoarders too.
We just love to get more of the yellow stuff and stuff them into our bank lockers.
Investment in gold has the potential to beat inflation over a long period. It is a safe haven when economic growth is slow and traditional asset classes such as equity and debt are under-performing.
There are various ways how you can get exposure to gold as an investment asset.
Buying gold in the form of jewellery has its own costs involved. The primary one is the making charge, which can be as high as 10 to 15%. There are costs associated even when you sell jewellery, especially when it is to a different jeweller. If you are looking at holding the asset for a very long term, other options will be more cost effective and liquid.
If you buy gold bar/coins, you will have to sell it to a jeweller who will deduct charges again during a sale/repurchase. With these costs and security concerns involved, holding gold physically may not be cost-effective.
Gold Exchange Traded Fund
This fund is a passively managed open-ended ETF, which invests in gold bullion and instruments with gold as an underlying asset, to provide investment returns that, closely track the performance of domestic prices of gold in the bullion market. When an investor invests in gold ETFs, the investment is done in physical gold of 99.5% purity. Gold ETF allows investors to buy gold in quantities as low as 1gm.
Gold mutual funds
A gold fund of fund invests in gold ETFs. Although the gold mutual fund is an easy option to invest in gold, it is generally is more expensive than Gold ETFs.
They are similar to gold ETF. It’s the only option where units can be converted to physical gold. You need to open a separate demat and trading account.
Sovereign Gold Fund (SGB)
SGBs are government securities denominated in grams of gold. They are substitutes for holding physical gold. Investors have to pay the issue price in cash and the bonds will be redeemed in cash on maturity. The Bond is issued by Reserve Bank on behalf of Government of India. The Bonds bear interest at the rate of 2.75 percent (fixed rate) per annum on the amount of initial investment. Capital gain tax arising on redemption of SGB to an individual has been exempted.
The best way to invest in gold is Sovereign Gold Fund (SGB). This route of investment in gold decreases the cost and taxation, provides you with safety against theft and an interest of 2.75% p.a.
The allocation of gold in a portfolio should not be over 5-10%. It may be used primarily to take advantage of its low correlation with other assets, and the ability to accumulate in small lots compared to other alternative assets.