India is one of the largest consumers of gold and the country’s average annual demand is around 800 tonnes as gold also holds a sentimental value here. Indians prefer to buy gold on two occasions—when they have surplus funds available and on festive occasions such as Akshaya Trithiya and Dhanteras! Here, we look at buying gold from an investment perspective.
Why gold should be a part of your portfolio?
As an approach to diversification and holding value in tough times, gold is an essential part of any portfolio. Normally, in any financial plan an exposure of around 5-10% to gold is recommended. This is because gold normally tends to increase in value in times of political strife and economic uncertainty. Consider the 1970s. Between 1971 and 1980 when the world was rocked by the oil embargo, Iran war, and the Russian invasion of Afghanistan, the price of gold went up sharply from $35/oz to $850/oz. Similarly, the post Lehman period, saw gold up almost threefold to touch a peak of $1,900/oz. These are times when equities and bonds take a hit, and exposure to gold can be extremely profitable. Of course, gold is, at best, a hedge and hence, additional exposure is not advised.
For years, Indian families have been investing in gold in physical form. This means that gold is acquired either in the form of gold coins, gold bars, or jewellery. However, this entails a cost. There is the cost of storing this jewellery, the risk of theft, and of course, you lose some value each time you convert it into another form. If you want to really participate in gold investments, more efficient ways exist. Here are some other ways you can invest in gold:
Investment in Sovereign Gold Bonds (SGB)
These are issued at intervals by the RBI and sold through agents. These bonds are linked to the price of gold and also offer an interest of 2.5% annually, which makes it a productive investment. After a gap of 6 months, these bonds are also listed on the stock exchange and you are free to buy and sell these gold bonds. These bonds are guaranteed by the government and are literally gilt-edged. Above all, maintaining these bonds is much easier because you can either hold them in the form of SGB certificates or even in your demat account. These bonds are free from capital gains on redemption; hence, they are also tax-efficient.
Investing in Gold Exchange Traded Funds (ETFs)
These are closed-ended mutual funds backed by gold. The mutual fund will typically keep equivalent gold with a gold custodian bank so your investment is fully backed by physical gold. Such ETF prices vary on a real-time basis with the actual gold price movement and are issued as units of grams of gold. Normally, units of an ETF represent 1 gram of gold, and if the market price is Rs32,000/10 gram, the ETF of 1 gram gold will quote around Rs3,200. There are no entry and exit loads, and one can buy and sell these gold ETFs in the stock market. Such ETFs can also be maintained in your demat account, which makes it a lot more economical.
Investing in Electronic Gold (e-Gold)
This is another popular method of holding gold and is also referred to as electronic gold or digital gold. This was first issued by the National Spot Exchange Ltd. (NSEL) and was quite popular. This product came in for a lot of criticism after the NSEL scam in 2013 when it defaulted on its contracts. Currently, digital gold is offered by SHCIL via Gold Rush and Paytm where it is possible to hold small units of gold fractions and sell them at ease. These are highly liquid and can be converted into cash at short notice. Such e-gold certificates are also backed by physical gold, and hence, largely risk-free.
Buying gold through gold futures
It is also possible to take a position in gold through gold futures on the MCX. Gold futures can either be purchased for actual delivery or for speculating on the price. However, this is a leveraged trade and one must buy gold futures only after understanding the risks associated with them.