(Photo: iStock)
(Photo: iStock)

Four ways to invest in gold, but should you?

  • Assess and add gold in your investment portfolio only if it is required
  • Gold returns are extremely volatile and you may find yourself at the wrong end of the stick when you have to exit

Global gold prices have risen 20% in the last one year and 14% in the last three months, while domestic gold prices are up 23% and 15%, respectively, for the same time periods.

Gold, typically, flourishes as a safe haven in times of uncertainty, and global trade wars, tensions between Iran and the western nations and slowing global economies are all contributing to a feeling of uncertainty. India is not immune to these conditions. “A number of global issues have surfaced such as the Iran conflict and trade wars, and gold serves as a store of value in such situations. Central banks were dumping gold and buying US dollars. Now we are seeing the opposite behaviour," said Sandip Raichura, chief executive officer, retail and distribution at Prabhudas Lilladher Pvt. Ltd. With investor interest rising in the yellow metal, we tell you about some of the options available for investing.

Sovereign gold bonds

Sovereign gold bonds are issued by the Reserve Bank of India (RBI) on behalf of the government. The bonds are denominated in multiples of 1gm of gold; the maximum one can invest in is 4kg. The tenor of the bonds is eight years, with the exit option available after the fifth year. They pay a fixed coupon of 2.5%. The issue price of the bonds is fixed at the simple average of the closing price of gold of 999 purity, or 24 karat gold, on the last three working days of the week immediately preceding the subscription period and can be redeemed at a price that is the simple average of the closing price of the last three days. The bonds are listed on NSE and BSE and investors can buy and sell the bonds on the stock exchange after the subscription period is over at the current market price.

You can buy the bonds using cash up to 20,000. Investors using online modes are eligible for a 50 discount on the issue price. The next tranche is scheduled to open from 9-13 September. The bonds can be bought from banks, stock exchanges, designated post offices and other notified sources.

Gold ETFs and funds

Mutual funds offer exchange-traded funds (ETFs) that invest primarily in physical gold with each ETF unit typically representing 1gm of gold. The equivalent physical gold is held with the custodian bank and valued periodically, as per the Securties and Exchange Board of India’s (Sebi) guidelines. The performance of a gold ETF is benchmarked against the domestic price. Ideally, the returns from the scheme should match that of the benchmark. But there may be variations on account of the cash holdings and the costs involved in managing an ETF. It could also be because gold ETFs are now permitted to hold financial instruments such as exchange-traded derivative contracts and the Gold Monetization Scheme.

ETF investors must have a demat account into which the units are credited and a trading account with a broker to buy and sell the units after the new fund offer for the ETF closes. This may be a constraint for some and mutual funds have worked around it by offering gold funds which are mandated to hold the units of gold ETFs. Investors buy units of the gold funds, just like any other mutual fund, and these funds invest in the units of the gold ETFs to give investors similar exposure to gold.

Physical gold

Traditionally, gold has been held in the form of jewellery, coins and bars. If you hold jewellery, you also have to pay for the making charges, which is deducted when you sell it off. This can be as high as 15% of the price of gold.

The government has launched the sale of BIS-hallmarked gold coins weighing 5gm and 10gm and gold bars of 20gm of 24 karat purity through Metals and Minerals Trading Corporation of India Ltd. (MMTC) outlets. The coins are available at MMTC outlets and designated banks. MMTC also offers the option to buy back these coins or bars at the prevailing price thus offering investors liquidity. Then there are gold savings schemes offered by jewellers, where buyers make periodic deposits and use the sum to buy gold after a specified period. Usually, such schemes offer a discount or a similar benefit.

Digital gold

This is a facility offered by MMTC-PAMP Pvt. Ltd., a joint venture between MMTC Ltd. and Switzerland-based bullion brand PAMP SA, to accumulate gold by buying online through institutions, broking houses and payment platforms such as Paytm, Stockholding Corporation of India Ltd (SHCIL), among others. The scheme allows investors to accumulate gold by regularly buying gold of value as low as 1,000. The accumulated gold is kept in secure storage in the custody of MMTC-PAMPL with full insurance and investors can ask for delivery in the form of coins of different denominations, the minimum delivery being 1gm. The gold will be kept in storage for a maximum period of five years within which period the investor has to take delivery.

Mint’s take

Don’t buy gold as a strategic allocation to meet goals. The returns are extremely volatile and you may find that your investments are in the red when you have to exit. Buy gold for some stability it can provide to the portfolio’s returns when other asset classes may be doing badly. However, the exposure should not exceed 10-15% even in these conditions.

Sovereign gold bonds are suitable for investors who may not need the funds in the short term. “I advise my investors to invest in gold only if they see a need to buy gold for a goal such as the wedding of children. The Sovereign Gold Bonds with the periodic coupon and exemption from long term capital gains if held till redemption is the most suitable product for the long term," said Gajendra Kothari, CFA, managing director and CEO, Etica Wealth Management. For investors who need liquidity, consider gold ETFs and funds.

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