Investing in Gold?
By Saral Agarwal
In India whenever we talk about investments, gold definitely finds its place. Gold is a good hedge against inflation and it has given a CAGR of about 12% over the last 50 years. So it’s definitely a good investment option, but when we invest in Gold do we actually get this 12% or is it just a fancy number?
Lets see how we can safely and conveniently invest in Gold and lets understand how we can actually benefit from the returns of Gold. Also lets understand why we are unable to get the full benefit of gold returns via the traditional way of investing in jewellery.
1) Making Charges: Gold jewellery and even gold coins have heavy making charges, somewhere between 8 to 20% because of this our returns take a hit.
For example if we invest Rs. 1,00,000/- in jewellery after deduction of making charges (8%) and GST (3%) we are left with just Rs. 89900/- worth of gold.
Assuming a 12% average return, let’s say that after 6 years the price of gold doubles and we go to sell this gold, at that point of time we will not get Rs. 2,00,000/- but we will end up with just Rs. 1,79,000/-.
2) Purity: If we sell our gold to the same Jeweller then we may still get the full value of Gold, but for some reason if we have to sell to some other jeweller, they deduct about 10% on the name of impurities so that Rs. 1,79,000/- worth of gold will now fetch just Rs 1,62,000/- moreover there is always a doubt on purity. If we go for branded and Hallmarked jewellery, the making charges are very high whereas if we purchase from smaller Jewellers, there is doubt on the purity.
3) Maintenance: To maintain the Shine and luster of gold, regular polishing is required which has an additional cost and if the gold jewellery goes out of fashion the whole cycle is repeated again.
4) Safety: Expensive jewelry has to be kept safely and for this a locker at home or Bank lockers are needed which also increases the overall cost.
So overall if you see, Rs. 1,00,000/- the gold jewellery in 6 years does not go to Rs. 2,00,000/- nor to 1,79,000/- nor 1,62,000/- but eventually goes to approximately 1,55,000/- which is just about 7.5% returns and that too when we take the lowest making charges.
So gold as ornamentation is really beautiful but if you are planning to invest in gold one should look forward to Gold mutual funds, Gold ETFs and Sovereign Gold Bonds which provide far better returns and also remove the challenges that come with purchasing physical jewellery.
Advantages of electronic gold:
1) Zero Making Charges: All these three options have zero making charges, if we invest Rs. 1,00,000/- into any of these we get Rs. 1,00,000/- worth of investment.
2) Purity: All of them are electronic forms of pure gold and when we sell them there are no deductions.
3) Safety: Since they are in electronic form, there is no risk of losing them or them being stolen.
4) Maintenance Costs: Maintenance charges (Expense Ratios) of the Sovereign Gold Bonds are zero but Gold ETFs have about .1 to .5% annual costs and Gold Mutual Funds have about .5 to 1 % annual charges.
5) Liquidity & convenience: They are convenient and simple to buy/sell. All the three options can be bought or sold sitting at home online either via mutual fund platforms or via Demat accounts.
Gold ETFs and gold mutual funds can be bought or sold on any working day but if you’re planning to buy Sovereign gold bonds it has a lock in period of at least 5 years and maturity period of 8 years. Also you can only buy it when the government issues fresh subscriptions to sovereign gold bonds.
6) SGB: SGB in particular have three additional benefits
a) If it is held till maturity, all the proceeds are tax free.
b) It gives an additional annual return of 2.5 %
c) You currently get a discount of Rs. 50/- per gram on fresh purchase.
It is because of these features that investing in gold in electronic form is more rewarding and beneficial. After all, here in India we have a special love affair with Gold & we deserve to get full benefits of its returns.
Many times this question arises, how much should we invest in Gold?
Now there is no perfect answer and varies as per people and situations, but in general we suggest that gold should have at least 5% and maximum 10% allocation in the portfolio.
If you have any questions related to gold investment let us know in the comment box it will reply to you as soon as possible.
To open a demat account and invest in Gold click here.
To invest in Gold Mutual Fund click here.
