Tuesday, May 28, 2013

Different Ways to Invest in Gold

Gold is not a logical investment option since it is impossible to keep track of the six major factors that drive gold prices. But we would still need to buy it, not for investing in it, but for social purposes -- for gifting on occasions/marriage. There was time when gold came in the form of coins and jewellery. Now we have many other options, bearing in mind the cost, storage and ease of buying and selling.

1. Physical Gold: Buying physical gold is important for those who require the metal for immediate use in family functions. Also, those who are paranoid about losing control need to buy it since all other forms of gold would involve a third entity and its security would never be 100%. Moreover, gold does not take too much storage space by virtue of its density. Physical gold suffers from two drawbacks –impurities as well as uncertainty of purity something that a saver cannot spot. Besides that, you have to look for a reputed jeweller, a certification or the Bureau of Indian Standards (BIS) Hallmark, which authenticates its purity. In addition to that, fear of theft, need for proper storage space and insurance costs could be issues. Also, your selling price would always be lower than the market price and since most of the physical transactions of gold happen in cash.


Do not pay in cash, to avoid the value-added tax of 1%. It would be hard to justify the source of money if there is an income-tax scrutiny or a cross-check of an entity’s books. Huge cash deposits or withdrawal from bank accounts are subject to questioning. Insist on taking receipt for gold purchase after paying VAT and pay capital gains on profits. In case you are cheated by a jeweller, you cannot file a complaint without a receipt.

2. Gold ETFs: Gold ETF is gold in electronic form, traded in the stock market and managed by mutual funds. For high net-worth individuals, buying a Gold ETF is a good option because Gold ETFs do not invite wealth tax and are easy to buy and sell. You buy them just like you buy stock of any company from your broker and provide you with returns that closely correspond with the domestic price of real gold. Each Gold ETF unit that you buy is roughly equal to the price of 1 gm of gold. Over time, you can build up your gold portfolio to the level you want, just as you would with your bank or jeweller.
The downside of investing in gold through the ETF route includes yearly expneses charged by the mutual fund, the inability to get physical gold in return, low liquidity and the fact that owning paper gold doesn’t give mental satisfaction in comparison to owning physical gold.

3. Gold Fund of Funds: Gold Fund of Funds are gold investment schemes launched by mutual funds which invest in Gold ETFs and can be bought and sold through mutual fund agents or through online websites offered by the fund houses. Unlike Gold ETFs, you do not need a Demat account or trading account and can be bought and sold on any working day. The fund’s NAV is, however, based on the closing NAV calculated basis previous day’s prices of gold.

Gold fund of funds levy two layer charges-one for the fund itself and the second for the underlying scheme. Besides that, you will be charged on exit; you won’t get physical gold through the scheme and you will be taxed, if you do not plan a SIP.

4. NSEL’s e-gold/e-silver: E-gold is the electronic mode of investing in gold, which allows conversion to physical gold anytime. You can buy e-gold units in the demat form through the National Spot Exchange (NSEL) platform. Each e-gold unit corresponds to 1 gram of gold. Investors have the option to invest and trade in gold without taking delivery of physical gold, saving them the holding and storage cost.

If you invest through this route, you bear Wealth tax of 1% (on amounts over Rs30 lakh) if the total value of your taxable wealth (together with the market value of e-Gold) exceeds Rs30 lakh. Also since exchange (NSEL) is new, it does not have a track record and a grievance redressal mechanism in place. It is not regulated, except by the Ministry of Consumers Affairs. In addition to that, you need a new, separate demat account for e-commodities.

5. Gold Purchase Instalments: A number of jewellers have introduced gold purchase schemes with incentives. For example, Tanishq of Titan Industries has the ‘11+1 Plan’ under the Golden Harvest Savings Scheme. According to the Plan, you pay in instalments for a fixed duration (11 months) and the jeweller will pay the last instalment. With this amount, you can buy gold anywhere in India from any Tanishq showroom at the end of the 12 months.

The  returns from such schemes is as high as 15% on your scaled investment. These schemes do not invite tax deducted at source since there is no interest. Also, these schemes do not hassle you to go through Know Your Customer (KYC) norms. But these are unregulated. If your jeweller shuts shop, you cannot turn to anyone for help.  You cannot buy gold. You have to buy only jewellery, which normally carries a 12% to 20% making charge and wastage. What you gain in one instalment, you lose in buying the jewellery. Reliance My Gold Plan offers gold at daily cost averaging and Bullionindia.com claims to offer it as wholesale prices. These schemes are fruitful if they charge you an average for the entire investment period and then let you buy gold, and provide you with certificate of authenticity.

As we discussed all the aspects of investment in GOLD, we have the conclusion, its best to do a SIP in Gold fund of funds. Its easy and convenient and also have immediate liquidity.
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Source : moneylife

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