Summary:
- There are 4 ways in which gold can be bought in India. These are sovereign gold bonds, gold exchange traded funds (ETFs), gold mutual funds and finally gold coins/jewelry.
- Sovereign gold bonds are offered by government of India for resident Indians. They fetch around 2.5% annual interest and track the price of gold.
- Gold ETFs and gold mutual funds track price of gold. As there are some expenses to manage these instruments, there is some difference (tracking error) between the performance of these and actual gold price.
- Gold coin and jewellery is traditional way to get exposure to gold. This is quite expensive way to get gold exposure.
- Personally, I prefer sovereign gold bonds for resident Indians. For sovereign gold bonds and ETFs, one needs to have a demat account.
After remaining flat for many years, the gold prices have started to move up. We have seen this happening many times. Gold prices remain stagnant for years and then they start moving up for couple of years. Gold is widely considered as inflation hedge. Hence, the demand for gold rises when there is possibility of pick-up in inflation. Gold is also called a “safe haven” asset. So, when there is some fear in the global financial market, demand for gold from investment perspective goes up. For emerging market country like India, the most important element of gold price movement is currency factor. Gold price internally is denominated in USD. In India, it is in rupee. Rupee, on average, depreciates against dollar. Historically, on average, rupee has depreciated by ~3.5% relative to US dollar. This means that even if gold prices were to remain the same (in USD terms), their price in India increases by an amount equivalent to currency depreciation. Enough of technical talks. Personally, I feel an Indian investor should have around 5% of their portfolio in gold. So, the next question is what is the best way to buy gold?
There are four main ways in which one can buy gold. These are:
- Gold coin or jewellery
- Gold mutual fund
- Gold exchange traded funds
- Sovereign gold bonds backed by the government
Let is have a look at pros and cons of each of the above ways to buy gold.
Gold as coin or jewellery
This is the traditional way of buying gold. There is a tradition to buy gold coins or jewellery on auspicious occasions. Gold jewellery is also given as gifts in marriages. Most of us (who can afford) always wear gold ring or chain. This is especially true in South India. A friend of mine who is from South India told me one interesting things about his gold jewellery. He told that there is a custom in his family to wear at least a gold chain and ring all the time. The reason behnd this custom is to have some financial cushion when one is far away from home. If there is some problem, one can raise at least enough money to return home by selling gold. Some pros of buying gold jewellery are:
- Psychological satisfaction of having gold
- Ease of buying and selling. No need to maintain demat account etc
- Serves dual purpose of storing wealth and a fashion accessory
Some main negative point of purchasing gold jewellery are:
- High cost of purchase and selling gold. Jewellers can charge anywhere between 10% to 20% of the gold as making charges. This is upfront loss when you buy gold jewellery.
- Risk of impure or fake gold. There has been many occasions (even in my family) when people realized that what the jeweler sold them as 22 carat gold jewellery is actually of inferior purity.
- High cost of storage. If one keeps a part of gold jewellery in a locker at bank, then one has to spend couple of thousand every year as locker rent.
If you want to buy gold jewellery as ornament, that’s fine. However, if you are looking to invest in gold, this is not the best way to do it.
Gold exchange traded fund (ETFs), E-Gold
Many people buy gold as consumption item. However, there are lot of people who buy gold as store of value. It protects against inflation. As discussed earlier, buying gold in the form of jewellery involves making cost, storage cost etc. To serve investors who are looking for cost-efficient exposure to gold, gold exchange traded funds were launched. The issuing company buys gold on your behalf and holds it securely. As it is buying gold (not jewellery) and storing it at a large scale, the cost associated with managing such a fund is limited. The advantage of buying gold ETFs are:
- Clean and direct exposure to gold
- Easy to buy/sell and low transaction and storage cost
The main negative point is that one needs to have demat and trading account for buying gold ETFs. No, if you are not trading stocks on regular basis, then this could be an additional cost.
Some wallet companies like Paytm also offer gold. One can easily buy on their app without any requirement to have a demat account. While it is convenient, I don’t know if this can be used for slightly bigger quantity from long-term perspective.
Gold mutual funds
Gold mutual funds are good option for people who don’t have demat account and don’t want to open a demat account. The features of gold mutual fund are similar to gold ETFs. Here you don’t have to pay brokerage for just buying and selling. However, gold funds are managed by mutual fund company and the annual cost is slightly higher than gold ETFs.
Sovereign gold bonds
Many people look to buy gold that they will need at some future date. Due to some considerations, government launched sovereign gold bonds (SGBs). One can buy SGBs to get exposure to gold. Normally, the maturity of 8 years. Key advantages of SGBs are:
- Annual interest income of ~2.5%
- Performance depends on price of gold
- Exemption from capital gain tax if held until maturity
- Ease of buying and selling
- Cheapest and safest way to buy gold
One needs to maintain demat and trading account for buying sovereign gold bonds.
Below is the key points of above discussion:
Disclaimer: The above content is just for information and should not be construed as an offer to buy or sell or recommendation. Contact your financial advisor for guidance on any investment related query.
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