Gold As an Investment in India By Basith A Abdul

As Indians we're passionate about gold. We are the world's second largest consumer of the yellow metal after the Chinese. But unlike others most of us buy gold as a social imperative - for a family wedding, for the dowry, for a festival, and so on. Historically gold has worked as a hedge against inflation. In times when the economic outlook is unstable people and governments try to hoard it in their treasury. So far in the recent past, with turmoil in the global economy gold prices have witnessed tremendous hikes and corrections too. Instead of joining the speculation of where gold prices will go from here, we make a simplifying assumption - that you buy gold regularly in small quantities irrespective of the price. This makes sense whether you intend to splurge at a wedding, or keep it purely as an investment. Unlike other commodities the price of gold depends upon the demand for it than its supply because there is more gold with people or governments than there are reserves under the earth. As an investment gold can make you richer as it appreciates with time. Holding it does not pay interest or dividend.
Any investor must not have 5-10% of their total assets as gold.
Let's see the best way to buy and hold the beautiful yellow metal.
Physical Gold

• Jewelry

If you are actually going to use gold as jewelry, nothing is better than buying it in that form. The making charges and jeweler's profits are worth paying for, if you are getting the chain or earring you have always desired. But there is eminent wisdom in buying gold as an investment too, to about 5%-10% of your total assets. Let's look at four ways to invest in gold, starting from the worst to the wisest way.

• Bars, Coins

The first people in the gold selling business are the Banks, with their gold coins and biscuits. They have special offers on Akshaya Tritiya, Dhanteras and other festive days. Not surprisingly, this is probably the most expensive way for you. Banks charge no less than 8% charges on the prevailing price. You then have to spend on a locker to keep it safe. Worse, they don't take the gold back; so should you wish to sell, you would need to run from pillar to post trying to get a good rate from a jeweler. Some of them may refuse to buy coins sold by others and may demand making charges.

• SBI Gold Deposit Scheme

If you have too many gold bars, coins lying with you they can be deposited with the SBI under its Gold Deposit Scheme (GDS) for 3,4 or 5 years and earn an interest of up to 1% per annum. The interest may not be attractive but you can get exemption on wealth tax and capital gains tax. The interest earned is tax-free too. You can deposit ornaments if you're willing to have them melted into uniform bars. When you want to take back your deposits their weight may be lesser than what you deposited because they undergo purification and refining to bring them to uniformity in the government's mint.
Gold Mutual Funds
If you do not have DP or trading accounts a good way to invest in gold is through Gold Mutual Funds. Gold MFs are fund of funds (FoF) that invest in Gold ETFs. There are gold-related funds such as the DSP BlackRock World Gold Fund, AIG World Gold Fund, Reliance Gold Savings Fund, Kotak Gold Fund, UTI Master Gold Fund, to name some. For a fee of only about 2% a year, you can invest in these funds, which buy and hold gold on your behalf. Here the prices move faster and further in both directions than the price of gold. An FoF is a fund that invests in other funds and the cost of investing in it is higher than investing in the constituent funds individually. A great advantage with Gold MF is that you are not compelled to buy complete units unlike in an ETF. So if you have Rs 20,000 to invest in gold you can buy units in a Gold MF but it would be insufficient for a unit of gold in an ETF. You have the option of systematic investment too so you can buy for as little as Rs 100 every month. SIPs are a good way to accumulate gold as an investment. Best of all, you can redeem them at a day's notice, at the prevailing market price (NAV). Gold mutual funds have not performed better than gold ETFs.
Gold ETFs
If you have DP and trading account, gold Exchange Traded Fund (ETF) is the better way to buy. They perfectly track the price of gold, and cost less than 1% a year. Currently there are 11 ETFs listed in the NSE/BSE. They are listed below in the order of their listing dates with the oldest one first:

• Gold Benchmark Exchange Traded Scheme
• UTI Gold ETF
• Kotak Gold ETF
• Reliance Gold ETF
• Quantum Gold Fund
• SBI Gold ETF
• Religare Gold ETF
• HDFC Gold ETF
• iCICI Prudential Gold ETF
• Axis Gold ETF
• Birla Sun Life Gold ETF

You can buy them the same simple way you buy shares - just lookup the symbol and place a 'Buy' order. These ETFs too buy the metal on your behalf and store it for you. Whenever you want, you can also sell them in a similar single click, at the prevailing gold price, just like you would with a share. A unit is close to 1 gram of gold. Since they are in the demat form there is no worry of safety and need for storage. Loans can be availed against units. Performance of difference ETFs can differ because of the difference in portfolios. Some have larger allocation in cash, money market instruments than others and may reflect gold prices better.
E-Gold
The newest option for investment in gold is E-Gold which has made financial asset of a physical asset. E-Gold is similar to shares that are bought on the stock exchange. It was introduced by National Spot Exchange Ltd (NSEL).You need to have a trading account and a demat account (separate from that for shares) with a DP linked to NSEL. Dematerialized gold can be purchased in units of1 gram of gold. The DP charges an annual maintenance fee of around Rs 350 and transaction fee for every transaction much like it is in stock exchanges. E-Gold can be traded on NSEL during its business hours. Since it is a pan-India exchange prices are same throughout the country. Unlike the case of gold coins, bars and jewelry there is transparency in price quotes. Loans can be availed against units. Every unit of E-Gold is backed by corresponding units of physical gold. If you decide to, you can convert the E-Gold units into physical gold through rematerialization. Delivery is made at select cities in India. A conversion fee is charged which depends on the amount of gold converted and units can be exchanged for coins or bars. There are a host of other charges involved such as VAT, octroi and delivery charges so only economical units should be rematerialized. E-Gold as an investment vehicle is yet to catch up with investors. Since commodity exchanges are less regulated than stock exchanges (which are regulated by SEBI) they may be more risky. When the market for it is sufficiently large E-Gold could become the best way to accumulate gold for investment in the long term. Till then you can use the safe and convenient ETF route of virtual gold!

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