Still interested in gold investments? Here’s how to go about it3 min read . Updated: 20 May 2018, 05:57 PM IST
When making gold investments, avoid jewellery and focus on Gold ETFs, gold mutual funds and bonds
India no longer seems to be a gold-obsessed country. This year, total gold demand in January-March 2018 fell by 12% in volume and 8% in value, according to data released by World Gold Council (WGC). The demand for gold was 131.2 tonne in January-March 2017, which has slumped to 115.6 tonne in Q1 2018.
Demand for gold jewellery also slumped 12% to 87.7 tonne from 99.2 tonne in Q1 2017. “Local gold price rises led to the second weakest quarter for jewellery demand in 10 years," said Somasundaram PR, managing director, India, World Gold Council.
According to the WGC, gold imports were down from 260 tonnes in Q1 2017 to 153 tonnes this year—a drop of 50%. Experts see low rate of returns as the reason for reduced investments in gold over the past two-three years. “Gold investments fetch just 5-6% returns, which are not much compared to 10-12% returns investors get in the equity and real estate markets," said Surendra Mehta, national secretary, Indian Bullion Jewellers Association. If you had left the money in a savings account, you would have got similar returns.
If you still want gold in your overall investment portfolio, here are some of the things you should note:
When you buy gold jewellery, other than the gold price you also have to pay making charges and tax. Most of the makers charge in the range of 7-25% depending on the design. If the jewellery is studded with a precious stone, you will have to pay for the gem. When you sell jewellery, you never get the making charges back. You also lose out on the money you paid for the stones studded in the jewellery. If you are buying gold for investment, avoid jewellery. If you want to buy it for use, you can negotiate making charges.
Coins and bars
You can buy gold coins and bars from a jewellery store, bank and fintech platforms. You can buy small denomination of less than 1gm from fintech platform. However, for physical coin, you will have to buy a minimum of 1gm gold. If you are buying from banks and jewellery stores, you have to buy more than 1gm coin. If you buy from a bank, remember they will not buy it back. You also have to pay tax. Do shop around to get the best price in the market and don’t forget to check purity.
Gold exchange traded funds (ETFs) are basically paper gold. The money you invest will be pegged to 24K gold. The underlying asset is gold and some cash. To invest in gold ETFs, you need to open a demat account. One unit of ETF is equal to 1gm gold and is held in electronic form. When you redeem, you don’t get physical gold. You will get money equivalent to the price of gold on the redemption day. ETFs have two costs — expense ratio and the cost of opening a demat account. Usually, the expense ratio ranges between 0.9% and 1%. It is basically the cost to manage the fund.
In case of gold mutual fund, the underlying asset is gold ETF. It is like buying any other mutual fund. As the underlying asset is gold ETF, which is pegged to gold price, your returns will be also equivalent to 24K gold. However, gold mutual funds have higher expense ratio. As it is linked to ETF, the fund house will add the gold ETF expense ratio to their expense ratio. Usually the expense ratio on gold mutual fund is in the range of 1.2-1.8%.
Sovereign gold bond, or 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. You can buy it from banks. You can buy a minimum of 1gm and a maximum of 4kg in a financial year. You get a 2.5% interest per annum on your initial investment amount which will be credited semi-annually. The maturity period is 8 years. Early redemption is allowed after 5 years.