Since ancient times, Gold has been one of the famous investment product of every investor. Often called, God’s own currency. And on earth too, every country buys Gold. This is the only way of investment which is accepted throughout the world. In the times of recession, Gold is a safe heaven. This is the only investment product where politicians can not play with its price. Choose as an ornament or as a investment – Gold is the first choice.
In Indian society, Gold plays an important role at the time of daughter’s marriage and religious festivals. Many parents start accumulating small quantity of Gold from the time of birth of daughter.
The demand for gold is ever growing and the gold source is ever depleting. As the result, gold cost is ever growing. An investment in gold is not only a reasonably rewarding investment but it is an investment that you can pass down from one generation to the next. By investing in gold you can make an investment that will last a lifetime. Gold is a hedge against inflation : as inflation goes up, the price of gold goes up along with it. Market cycles come and go, but over the long term, gold retains its purchasing power. Gold is a precious commodity. On a global level, the wealth of a country is determined by the quantity of gold bullion it has.
Some of the ways you can invest in Gold in India are:
- Gold ETF
- Gold Mutual Funds
- Multi-asset Mutual Funds
- International Gold Funds
- Jewelers Gold Scheme
- Reliance My Gold Scheme
- Gold from Banks
- Indian Post Office
- Muthoot Group
- Gold Futures
- Listed companies of stock market
We’ll discuss each above option in detail here.
1. Gold ETF:
Gold Exchange Traded Fund is a fund with stock market where you buy units of Gold just like you buy shares of any company from your broker. 1 unit of Gold equals to 1 gm of Gold without physically owning it. These are exchange traded funds that are meant to track closely the price of physical gold. E.g., if 1 gm of Gold rate as on today is Rs.3205, your Gold ETF rate will also be much closer to it. You just have to pay brokerage charges+STT and service tax to your broker, just like you pay for buying shares.
Here the fund house is responsible for the security of Gold.The price of Gold ETF is transparent as it is traded on stock exchange.
You can buy it online through your trading and demat account. Ask your broker for online username and password for the same.
So gold ETF lets you own gold in your demat account. Thus investing in a gold ETF provides the benefit of liquidity and marketability which are a limitation of owning physical gold. Gold ETF is liquid because you can trade in it at any time during market hours. Gold ETF is marketable because you can trade any amount in it just like a normal stock including short selling and buying on margin. Owning gold ETF also is cheaper than owning physical gold because it has no cost of carry (the cost of storing physical gold).
Some of the liquid Gold ETFs are SBI GETS, Reliance * share, etc.
Some brokers, like Sharekhan, provides investing in Gold ETF via SIP also.
Benefits of Gold ETF: Gold ETFs provide an opportunity to investors to accumulate gold over a given period of time. Since it can be purchased in small quantities, one can plan the procurement as per future requirements, say, for the marriage of children, etc.
Moreover, there is no risk of theft and one need not worry about the storage cost (as in case of physical gold) because such units are held in demat or paper form. In the case of physical gold, one ends up paying extra for making charges as well, but there is no extra charge applicable in gold ETFs. When needed, one can exchange them in multiples of 1 kg units of 0.995 purity.
Besides, unlike gold coins and bars, for which most jewellers offer only an exchange and not a buyback, gold ETFs can be sold at transparent prices across India. Even in terms of taxation benefits, gold ETFs are way ahead of the physical gold. No sales tax, VAT or securities transaction tax is applicable on gold ETFs. As units of such funds are traded like stocks on the exchange, it is eligible for the long-term capital gains after one year, unlike physical gold, which is eligible for long-term capital gains after three years. Besides, unlike physical gold, investors don’t have to pay wealth tax on gold ETFs.
Drawbacks of Gold ETF: Most of the above-mentioned advantages come at a cost in the case of gold ETFs. A small asset management fee is charged by the fund house, so the return is slightly less than the actual increase in the gold price. Moreover, there are additional costs involved at the time of buying and selling in the form of brokerage or commission. Another drawback with gold ETFs is liquidity; some ETFs are illiquid, which impacts their buying and selling flexibility. Hence, investors should consider this as a factor while investing in gold ETFs and should stick to funds that are liquid.
2. Gold Mutual Funds:
For those, who don’t have demat account, can invest in Gold ETF via Gold Mutual Funds. Gold mutual funds is a scheme where the fund manager will invest the money in Gold ETF. Since, the Gold mutual fund will also have some expenses, the returns of Gold mutual funds will be slightly lower than Gold ETFs.
You can invest in Gold mutual funds via SIP also easily be submitting the ECS form just like you invest in any other equity or debt mutual funds. Here the NAV of the scheme will track the returns of Gold ETF, which itself tracks the price of Gold. E.g., if you invest in HDFC Gold Fund, the fund manager will invest your money in HDFC Gold ETF.
One of the common question asked here – out of both – Gold ETF and Gold Mutual Funds – which is better?
The answer is if you’ve demat account, Gold ETF is much better than Gold mutual funds as far as returns are concerned. This is because in Gold mutual fund, you’ve to pay additional expenses of mutual fund also. Also, in case of Gold ETF, you can buy Gold on dips of intraday fall of Gold ETF, while in case of Gold Mutual Fund, the NAV declared by the fund at the end of the day is final and is applicable to you.
I’m also giving the comparison of returns from various Gold ETF and Gold Mutual Funds.
Source: moneycontrol.com – returns as on Nov 1, 2012
As you can see from the above table, there is hardly difference in returns in different time frame. The reason is simple. All the AMCs are investing in single metal – Gold. So, you can invest in any Gold mutual fund of your choice.
Now, coming to Gold ETF chart.
Here also, the returns over different time frame almost same. There is hardly any difference.
3. Multi-Asset Mutual Funds:
Another category of mutual funds to invest in Gold is multi-asset mutual funds. Such mutual funds will invest in equity + debt + Gold under a single fund. The fund manager has a flexibility to increase or decrease its exposure in 3 assets as per market conditions. Some such mutual funds are:
|Name||1 Year Return (in %)|
|Axis Triple Advantage||14.14|
|Fidelity India Children’s Marriage||18.7|
|Kotak Multi Asset Allocation||11.15|
|Morgan Stanley Multi Asset Plan B||NA|
|Peerless MF Child||9.16|
|Religare MIP Plus||10.09|
|Sundaram Equity Plus||6.98|
|Taurus MIP Advantage||11.39|
|Union KBC Asset Allocation Moderate||NA|
|*NA – not completed one year|
The case for multi-asset funds is compelling, especially for risk-averse investors. It is a useful strategy during volatility because it helps deliver consistent returns. However, don’t expect a spectacular performance. If equities rally in a year, a multi-asset fund won’t be able to match the returns that a pure equity diversified fund will be able to generate. However, you can expect it to give much superior returns when stocks are being beaten down since the debt (and perhaps, gold) portion of the fund will prop up the overall returns.
Interestingly, since these funds dabble in different asset classes simultaneously, it requires the expertise of more than one fund manager. So the equity portion of the fund will be managed by one fund manager, while the debt side may be another person’s responsibility. While having specialists for each asset class is a necessity for such schemes, it may limit an individual expert’s freedom in taking aggressive positions or cash calls.
A crucial point to consider is how the returns from a multi-asset fund will be taxed. This will depend on the allocation. If the fund maintains an average allocation of 65%, or more, of the corpus in equities for the year, it will be treated like an equity fund. If not, the fund will be considered a debt fund.
4. International Gold Funds:
There is a mutual fund scheme from DSP BlackRock AMC called “DSP BlackRock World Gold Fund” which invests stocks of Gold mining companies. The Fund invests predominantly in units of BlackRock Global Funds – World which invests in equity securities of companies worldwide whose main business activity is gold mining.
Till late 2012, the fund was giving almost same returns as of Gold but it is underperformer from then.
One of the main reason is that in recent times Indian Gold prices have risen because of weakness in rupee as comparison of US dollar. But this has no impact on this particular mutual fund.
Secondly, the stock market gives shocks from time to time on number of economic and technical factors, which results in low share price of Gold mining companies. And during that time, Gold price may continue to rise.
That’s why in the lat 1 year the fund has given a return of -7.6% against Gold price appreciation of 9.7% return from HDFC Gold Fund.
Another popular way to invest in Gold in India is E-Gold. This service is provided by National Spot Exchange Limited (NSEL). You just need to open demat account with the broker associated with NSEL. You can buy gold in the form of units, where 1 unit is equal to 1gm of gold, just like Gold ETF. The only difference here is you can take physical delivery of Gold from NSEL, if you wish. The delivery centres are in Ahmedabad, Delhi and Mumbai. You have to pay VAT and other state taxes too, if any. There are many brokers which are providing demat account for NSEL like Sharekhan, India Infoline, Geojit, Karvy, Religare, IFCI etc. Do check the brokerage charges + taxes before you open your NSEL account.
As Govt. has banned NSEL, forget E-gold for now. Check below other options.
Since ancient times, this is one of the popular way to shop Gold. Infact, just few years back, this was the only way to buy Gold in India. You visit your favorite jeweler shop, select the design and order for it or buy ready made ornaments. You can also buy Gold coins, biscuits, bricks etc.
Here the main point in buying Gold is that you have to TRUST your jeweler whatever he says. There is no way to check its authenticity. E.g., if a jeweler says that the ornaments selected by you is of 22 carat, you can’t do anything, except to believe him. Also, you’ve to pay making charges + taxes in addition to the price of Gold.
Do not get attracted towards “100% buy back”
The most negative point in buying Gold from jewelers is they NEVER give you full price when they buy back Gold from you. Ofcourse, at the time of buyback, they will deduct making charges + taxes, they will also deduct about 10% (at least) of market Gold price from your Gold. So, you suffer 10% flat loss when you sell your Gold back to jewelers.
Even reputed jewelers like Tanishq also deducts 10% from Gold price. They claim that they have mentioned in the terms and conditions on the bill. Read that carefully.
If you try to sell the Gold jewelery to some other Gold jeweler, they deduct more than 10% of market Gold price.
Also, it has been several times, that when customers goes to sell their ornaments to same jewelers, they even DENY that they made those ornaments. In the absence of original (pakka) bill, you can’t prove that.
Another drawback is that it’s your responsibility to secure Gold at home. In case of E-Gold and ETF, it’s the responsibility of NSEL and AMC respect. But here, you’ve to take extra precautions to prevent from thieves etc.
Some jewelers like Tanishq have Karatmeter in their showrooms, wherein you can check the purity of Gold there itself. They put your ornament / coin under the machine and the machine tells you the purity of Gold in just few minutes.
7. Jewelers Gold Scheme:
Recently some jewelers like Tanishq, PC Jewelers etc. have introduced various schemes to buy Gold in installments. The common way is that the buyer gives some fixed price to the jeweler for a pre-defined period (e.g. 11 months) and the last 1or 2 installments will be paid by the jeweler.
But what’s the catch here.
Firstly, you can NOT buy Gold coins, biscuits or bricks under this scheme. You can only buy Gold ornaments. That means you’ve to pay making charges as decided by the jeweler.
Secondly, the buyer is under an obligation to the seller to purchase the gold at the prevailing market rate. If at the time of booking jewellery, the gold rate is Rs 2800/gram but after the completion of installments, the rate increased to Rs 3000/grams, then buyer has to pay Rs 2000 extra for every 10 grams due to change in price of gold.
Thirdly, these schemes are not regulated. So, there is always a risk of losing your money.
Fourthly, the main terms and conditions of such schemes will come to know at the end of period when you go there to buy Gold.
Also, the issue of security and buy back have already been discussed above.
You may also like article titled “Why NOT To Buy Gold Under The Jewellery Scheme?” at http://www.investmentkit.com/articles/2012/06/do-gold-jewellery-schemes-really-benefit-buyers/
and also another titled “Do you really gain from investing in a gold savings scheme?” at http://www.investmentkit.com/articles/2012/12/do-you-really-gain-from-investing-in-a-gold-savings-scheme/
8. Reliance My Gold Plan:
Very few investors are aware of this scheme as this is not so popular scheme at this point of time. You buy Gold in electronic format for a period of 12/24/36/48/60 months and you have the choice to convert your accumulated gold grams into coins at multiple outlets across India.
- Similar to conventional savings plans
- A medium to accumulate physical gold in small quantities at periodic intervals
- A customer puts aside a fixed sum of money every month
- The fixed sum then buys gold every trading day in that month
- Save gold through a process of daily rupee averaging of the price of gold over a sustained period in time
- At the end of the term exchange in the form of Gold Coins
- Accumulation of Gold Grams: Customers can accumulate gold grams through small subscriptions over a sustained period to meet objectives like daughter’s wedding, planned gifting, to name a few.
- Affordable: Low entry level with a minimum payment of `1000/- and in multiples of `500/- thereafter
- Cost Averaging/Daily Pricing: For all “Clear Funds” from purchases (First time / Monthly / Additional) gold grams would be purchased over the next 20 successive business days in equal tranches and gold micro grams allotted at “Beginning of Day” prices declared by RMPM.
- Gold Rates Benefit: More gold grams credited when the price of gold is low
- Guaranteed Purity: 24 Karat with 99.5% purity
- Flexibility of Fulfilment: Choice of obtaining accumulated gold grams in the form of coins
- 100% Secure: Security Trustee appointed for the benefit of customers. Accumulated gold is kept in safe custody with professional custodians in insured professional vaults. Delivery of gold to end customers under an insured mechanism through coin fulfillment partners
- Gold Gram Benefit: Credit of physical gold grams in 4 decimals rounded down
- Multiple Modes of Payment: Cheque / DD / Pay Order / Cash / Direct Debit / ECS
- The Plan is NEITHER a financial product NOR a deposit but a method of accumulating gold for the personal needs of the customer. RMPM offers no investment advice or any assured returns while promoting the Plan.
9. Gold from Banks:
Now-a-days, many banks offer Gold coins. Let’s explore it also.
RBI has given clearance to many Indian banks to sell Gold to the customers in the form of Gold coins. More and more banks are getting clearance from RBI every now and then.
You need not to be a account holder of a bank to buy gold from them. The only point here is that you can do cash transaction in Gold till Rs.50,000. Above that, you can do it via cheque, NEFT, ETGS etc. So, just visit the bank of your choice and walk-out with pure 24-carat Gold coin. Not only that, many banks will also give you certificate of purity.
Most of the banks in India import gold coins from Switzerland as per tie up with one of the reputed foreign suppliers and such coins are 24 carat pure gold carrying 99.99% assay certification (signifying the highest level of purity as per international standards). These coins are usually available in 1gm; 2.5 gm, 5 gm; 8 gms; 10 gms; 20 gms ; 50 gms and 100 gms. (However, each bank does not sell all type of gold coins). These coins usually also bear the logo of the bank selling the same.
Now, let’s see the catch.
Firstly, since selling Gold is NOT the bank’s core business, it adds extra costs to them to import and sell it. So, the price of Gold coins from Banks are MUCH higher than available from jewelers or branded retailer after adding bank’s own profit on that.
E.g. today’s Gold price in Delhi is Rs.32,400 per 10 gm, while ICICI bank is selling is Rs.37,376.22 i.e. difference of 15.35%.
ICICI Bank is offering discount of 7% now. I don’t know whether it’s because of Diwali festival season or some thing else. But still, after considering discount of 7% on 10gm, it comes to be difference of 8.35%. Add other taxes as per state.
Secondly, these prices are fixed. No bargains, which you can do easily with local jewelers or even branded retailers, if you give some bulk order.
Last but not the least, as per RBI guidelines, banks are not allowed to buy back Gold from customers. That means, to liquidate your banks Gold coins, you need to visit your local jeweler and sell them at the discounted rate decided by them. Ofcourse, you can not ask more just because of bank’s certificate of purity.
You can visit official website of bank to know the Gold price they are offering for a particular day.
10. Indian Post Office:
Just like banks, India Post has has introduced gold coins with India Post logo for sale to the customers across India. The gold coins are of the denomination 0.5 g, 1 g, 5 g and 8 g of 24 carat with 99.99% purity. The gold coins are manufactured by Valcambi, Switzerland and have the benefits of internationally recognized certification, quality packaging, product standardization and assayer certificate.
This facility is available in 630 Post offices across India. You can check the list of post office branches selling Gold at http://www.indiapost.gov.in/GoldCoins.aspx
The official website of Indian Post does not give the rates at which they are selling Gold. But I found that they charge 4% extra premium over and above the Gold rate as their profit. Also, like banks, they also can not buy back Gold from the customers.
11. Muthoot Group:
It is one of India’s oldest finance group dealing in Gold. From Gold loans to gold coins – they deal in number of services. They sell Gold via Muthoot Precious Metals Corporation. You can buy 24 carat pure Gold coins in different sizes and in different denominations from 1 gm to 50 gm. Just visit any of their branch located throughout India or visit their official website http://www.muthootpreciousmetals.com/ to buy Gold coins online.
At the time of writing this article, they are offering 1gm of Gold coin at Rs.3570 (plus taxes) against Gold rate of Rs.3240 /gm in Delhi. That’s a difference of about 10%.
They also offer Gold schemes wherein you can invest every month.
|Fast Gold Against
Insta Gold Scheme
(Minimum 10 gm or in the multiples of 10 gms)
|Kanak Vrishty Insta
Gold 2 Scheme
(Minimum 2 gm)
|Down Payment||NIL||1/12th of the cost of the booked value of gold coin||1/6th of the cost of the booked value of gold coin|
|Processing Fee||NIL||3.0 % (One Time with first installment)||2.0 % (One Time with first installment)|
|Interest Rate||1 % over the contracated rate of interst offered on their gold bond||NO||NO|
|Interest type||Flat rate|
|Scheme Duration||Any Period but if it exceeds the maturity period of gold bond then the payments against gold bond will be given after adjusting the balance payment or alternately the customer may renew the bond.||12 months||6 months|
|Loan Limit Minimum||Up to 90 % of the face value of the Gold Bond||NIL as this is booking only||NIL as this is booking only|
|Loan Limit Maximum|
|Can we give cash instead of gold after the maturity of scheme||N/A||NO||NO|
|At What rate the gold coins will be billed||At the time of availing the scheme||At the time of booking the gold coin||At the time of booking the gold coin|
|When will the gold coin be delivered||Immediately at the time of availing the scheme||On the maturity of the scheme i.e. 12th Month||On the maturity of the scheme i.e. 6th Month|
|Any Other Benefit||NO||NO||NO|
|Target Customers||Prospects with Bond deposit with us who needs the gold coin immeditely at today’s rate but do not have ready cash and do not want to break their bonds either.||Prospects who are rich and have sufficient and regular disposable income.||Customer we were targetting through our SSC/GIS schemes|
You must read pros and cons of such schemes mentioned earlier.
12. Gold Futures:
You can also buy Gold futures from commodity exchange like Multi Commodity Exchange of India (MCX) or National Commodity & Derivatives Exchange Ltd (NCDEX).
In MCX, there are five contracts in gold — Gold (1 kilogram), Gold Guinea (8 gram), Gold HNI (10 gram), Gold M (100 gram) and the recently introduced — Gold Petal (1 gram). The contract is settled on the expiry date before which the trader is required to either square his position by selling it or pay the full value to take delivery.
In a gold futures contract, the initial margin requirement is 4 per cent. An additional margin according to the specifications of the exchange would be levied only in cases of high volatility in price.
What does this mean?
Lets say, you want to buy one lot of “Gold M (100 gram)” in futures, you need only 4% margin. It means you need cash for only 4 grams (4% on 100 grams). Lets say 1 gram Gold trades at 3000 Rupees. You would need 12,000 Rupees to buy one lot of “Gold M (100 gram)” in futures.
Lets say, you buy at 3000 and sell at 3030. You will gain 3000 Rupees (30 * 100) on your investment of 12,000 Rupees. Its a similar case with losses if it drops below 3000.
You must know that in such futures, you won’t get Gold in your demat account just like you “hold” shares or Gold ETF. You need to maintain strict stop-loss or be ready to suffer heavy loss. You’ve to give extra margin money to your broker at the end of the day, if Gold future price closes below your purchase price; otherwise the broker will cut your contract and you’ll suffer real loss what you were seeing on your computer screen.
Gold futures is good for those who are expert in trading in Gold and have knowledge of trading with lots of extra money to cover their losses. But not for those, who want to accumulate Gold for future for investment purpose.
13. Listed companies of stock market:
Last but not the least, you can buy shares of listed companies whose primary business is selling Gold. From big showrooms to retailers, and from multi-city presence to exports – you can bet on their business; especially during festival season. Some such companies are Titan from Tata (under brand name Tanishq), Gitanjali Gems etc.
But remember, sometimes the stock price of these shares does not move accordingly with Gold price and downfall in stock market may lead to correction in these shares also.
There are numerous ways to invest and trade in Gold. You should first decide your purpose of investing in Gold. If it is for your daughter’s marriage and you have demat account, start investing in Gold ETF via SIP. If your broker does not allow SIP in Gold ETF or you do not have demat account, consider SIP via Gold mutual funds. Invest more when you see correction in Gold prices. This way you can create wealth in the form of Gold.
Note: I’ve tried my best to cover major points in each different way to invest in Gold. If you think, you need more detail analysis, just mention below and I’ll write the complete article on that. Also, I might have missed some other ways for Gold investment or with the passage of time, more ways will come. I’ll keep updating this article then.
Waiting for all your comments / query / feedback.
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November 24, 2012