Investment in Gold is guided more by emotional and social reasons than financial ones in our country. People in India prefer to hold the yellow metal as jewellery which however just makes a couple of guest appearances in few functions and then spends the rest of its life in the bank lockers. However, inspite of its lesser utility, households find it wiser to purchase gold jewellery, since it enables them to have little exposure in gold out of their total savings.
With Gold giving returns of around 9-13% in the past 6 months, investors have again started looking beyond gold as jewellery and considering it as an investing instrument instead. This article focuses more on Gold as an Investment option.
Why to Invest in Gold?
As discussed in an earlier post on diversification, it is important to have an exposure to various class of assets instead of just sticking to one. Gold acts as a preferable choice for diversification to reduce risks since its price generally moves in opposite direction to that of the other investments like stocks, bonds etc. It has consistently served as a hedge against inflation and depreciating currencies and thus certainly deserves a consideration as an investment. But still given the consistently moderate returns, gold should not generally exceed 10% of the total portfolio.
Which Gold Investment Option to Choose?
Earlier, to have an exposure into Gold, gold jewellery and gold bars were the only choice available. However, with the evolution of the capital market, many new investment options have emerged to provide an exposure to Gold in the portfolio. Let’s analyse each option one by one:
- Physical Gold – This is the most traditional method used for investing in gold jewellery or gold bars. Still, storage and safety issues of physical gold add to the holding cost and therefore eat into the returns from the investment. Further, the quality assurance of the physical gold is always disputable.
- Gold Exchange Traded Funds (ETFs) – Gold ETFs are the funds investing into physical gold as an underlying. However, for an investor, it is available as units of ETF. Hence, it is always easy to invest in Gold ETFs without worrying about purity and storage of the gold since the same is taken care by the Asset Management Company. However, Gold ETF investment comes with an expense ratio of 1% in most of the funds, which should be considered while considering returns from Gold ETFs. Further, such an investment can be made only through demat accounts.
- Gold Funds – A Gold fund is a fund that invests in the Gold ETFs, which are available in denominations as less as Rs. 1,000. Since these funds have Gold ETFs as underlying assets, all the advantages associated with Gold ETFs come along with investing in gold funds. Only thing that goes against Gold funds is that these come coupled with a dual cost structure with expense ratio of the AMC besides the existing expense ratio of the underlying ETF.
- Sovereign Gold Bonds (SGB) – To reduce the demand of physical gold, Indian Govt. had introduced SGB Scheme for enabling an investment exposure in Gold for those who wish to invest in the yellow metal. The minimum amount required to invest is 2 grams of gold with a ceiling of 500 grams in a year. These bonds are being issued by the Govt. between specific time frames with a pre-decided issue price and have a 8-year tenure with an exit option after 5th year. What helps SGBs to score over other investment options is that while other options have a definite cost associated with the investment, it comes with zero cost and instead with an additional 2.75% interest per annum on the investment amount. Hence, over 8 years, the investor has already pocketed 22% of the amount invested besides the appreciation in the commodity. Further, this year’s budget placed SGBs into more advantageous position by making the maturity of SGBs tax-exempt.
Just making an analysis of costs of different investment options on an investment of 50 grams of gold, gold bars cost you Rs. 1,100-2,000 as locker rent, Gold ETFs cost you Rs. 1,500 and Gold funds will cost you Rs. 2,250. On the other hand, SGBs don’t cost you anything but in fact will pay back Rs. 4,125 per year. This translates into a minimum benefit of Rs. 5,225 per year over an investment amount of Rs. 1,50,000, thereby a return of 4% without considering any appreciation in the underlying, which shall further add to the returns. With all this analysis, I also shifted my investment in Kotak Gold Fund into Sovereign Gold Bonds.
“All that Glitters is not Gold” is an old proverb. For an intelligent investor, “all that glitters is not gold but can be Gold ETF, Gold Fund and Gold Bond too.” Are you one of those intelligent investors?
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5 thoughts on “Investing in Gold!”
Very informative Simardeep! Could you tell me how to invest in SGB? Can it be done through any bank? Or is a demat account needed? Thanks
Very informative! I’m learning many new things from your blog and I’m glad I came across this space.
Love the quote, all that glitters is not gold but it can be gold fund, Giold bond etc…
I need to check these Gold sovereign bonds.. Did not know this existed.
SGB .. hmmm ! Some golden Food for thought here