How to invest in Gold?
We all love the yellow metal, don't we? Be it in whatever form, jewellery or others. Nothing can match the emotions that are attached to the buying of gold jewellery. In India, we buy gold jewellery either out of desire (to wear gold ornaments) or needs (mandatory purchase in marriages and other functions). This is an expensive way of buying the precious metal since a buyer has to pay for the craftsmanship associated with the making of jewellery, which increases the total cost. Moreover, selling of the jewellery may not fetch the same price in case the current market price does not exceed the buying price.
It is one of the purest forms of gold. All the commercial banks and financial distributors are authorised to sell gold coins of 24 karat (the purest), with a certification from an independent agency. The prices of gold coins depend on the daily market rates of gold. But banks don't buy the coins back, so our only option to get our money back in this case will be by selling the coins to jewellers at the prevailing market price.
Gold mining companies
It is not a direct investment in gold but in the stocks or shares of a gold mining and exploration company. It brings additional rewards as well as its share of risks. The price of these stocks moves with the price of the gold and also depends on the company's future outlook. In India, there are not many gold mining companies but on the international front one will find companies such as Newcrest Mining, Barrick Gold, Impala, Gold Corp, Lihir Gold, etc. However, we can invest in world (gold) mining stocks through mutual funds such as DSL BlackRock (DSPBR World Gold Fund) and AIG India MF (AIG World Gold).
Gold futures are a sophisticated tool to invest in gold markets. But be cautious: Risks attached to gold futures are of the highest level. One can make 500 per cent in a single day by trading in gold futures or even lose all the money put up. However, gold futures are not about minuses only. Its plus point is it eliminates the hassle and costs of settlement and storage. Investors need much less money (margin money) to participate in quite large scale. Even traders can short sell as the market is deep and liquid. But these options are not recommended for retail investors.
It is a very recent development that the market regulator SEBI allowed gold Exchange Traded Funds (ETFs) in India. Gold ETFs enable investors to purchase and sell shares of a mutual fund whose primary asset is gold. These funds are listed on the stock exchanges, i.e., can be bought or sold like other stocks or shares. But one needs to have a demat account and a share trading account to invest in gold ETFs. The unit size in a gold ETF is as small as one gram of gold equivalents. Investments in gold ETFs are eligible for tax treatments similar to that in a debt mutual fund and subject to long-term capital gains after one year against three years for physical gold. The cost involved is also less and investors do not face the risk involved in holding gold like theft. Some of the gold ETFs are UTI Gold ETF, Gold BeES, Kotak Gold ETF and Reliance Gold ETF.
This investment avenue is open for investors with a higher investment corpus or greater risk profile. Gold bullion or bars can be bought or sold with the help of brokerage firms or gold dealers. It is traded on commodity exchanges, i.e., MCX and NCDEX, at an amount above the market price of gold. Investors can keep the bars in their custody or leave them with the broking firm. Though the brokerage charged in this case is very low compared to market price, its overall cost is more as it also involves storage and assay (analyse gold to determine its composition) costs.
Historical returns of different gold investment options
Let us analyse the performance of different gold products as on July 31, 2009 with the help of Table 3. The data has been obtained from www.mcxindia.com and www.mutualfundsindia.com, an online arm of Financial Technologies and ICRA Online Ltd, respectively. The table shows that all investments with gold as an asset have given comparable returns of around 16 per cent while the return of gold mining dedicated mutual fund (AIG World Gold) is stipulated to a paltry 3.48 per cent. The fall in return in the mutual fund can be attributed to underperformance of gold mining stocks due to a slump in gold demand. But in case of gold ornaments and gold coins, the return would be comparatively less than gold bullion and gold ETFs as they also involve making costs and storage costs.
Gold in portfolio
Since gold has emerged as an asset class, fund managers are advising investors to allocate at least 10-20 per cent of their investment portfolio towards gold, irrespective of their risk appetite. It has seen that trading in Gold ETFs is the best way to invest in gold given its low cost of buying, high liquidity, low risk associated with it, etc. Moreover, whatever be the economic scenario, gold will always remain the best hedge against inflation and also help in achieving our long-term goals.
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