January 30 , 2013
Gold is a much loved investment choice. Grand occasions are incomplete without buying the yellow metal. Traditionally we have always loved accumulating gold. So much so that we are the world's no 1 consumer of gold. Though few people consider their gold holding as investment they can only wear so much gold; the rest is as good as an investment. Gold is certainly good to have in your investment kitty but we need to graduate from the traditional ways of acquiring it.
Jewelry and coins a no-no for gold investment
If you need gold for adorning yourself with those beautifully designed ornaments you always wanted, the best way to go about it is buying gold jewelry-no doubt about that. And many times we stretch ourselves and buy more jewelry than we can use thinking, 'after all I am making a great investment choice'. There is no problem with the investment but jewelry or for that matter gold coins and biscuits are a poor means for investing in gold. Here are few reasons why:
1. First of all there is making charge for gold jewelry. This could be a fixed amount charged by the jeweler or in many places a percentage up to 10-15% of the value. This is an utterly useless price to pay considering gold for investment.
With jewelers there is the issue of purity of gold. Hallmarked jewelry is safer but you cannot trust the purity of gold jewelry bought from small jewelry shops. Pricing of gold jewelry lacks transparency.
2. Banks are the biggest sellers of gold coins and gold bars. They charge a premium of around 8% on the prevailing price. To top it you need to store coins and jewelry in safe lockers and need to pay the bank or NBFC for it again.
3. This is the worst reason for avoiding coins and bars. Banks do not buy back coins or bars. So you are left with the jewelers. Running from pillar to post you might find a jeweler willing to buy at a good price but many of them might refuse to buy coins bought from others. Some of them demand making charges for gold coins.
These can nullify or at least lessen by a significant margin whatever value is created by holding gold. Now here is a patriotic reason for buying less gold in the physical form- around 80% of India's gold demand is met through imports. According to official figures, gross import of gold has played a major role in pushing India's current account deficit in the year 2011 to uncomfortable levels.
Look beyond gold coins and jewelry
There are ways to take part in the price movement of gold without physically holding it. Gold mutual funds, gold ETFs and e-gold are interesting vehicles that help to achieve this. All the issues with physical gold are resolved in these.
Gold ETFs allow you to buy units corresponding to 1 gram of gold. This is held in demat form and you need a demat account to get started. There is greater price transparency. You can buy or sell units on the stock exchange. A fee of around 1% is charged by the company managing the ETF which is deducted from the returns. Gold ETFs are the best way of investing in gold.
Gold mutual funds invest in gold ETFs. If you do not have a demat account this is the next best way to invest in gold. Charges are higher at approximately 2% for gold mutual funds. But it has a very useful advantage. You can have SIP mode of investment that allows you to invest amounts as small as Rs 100 in gold funds. This is an effective method for accumulative small quantities of gold in your investment bag.
e-Gold is a new concept. You can purchase units corresponding to 1 gram of gold on the commodities exchange NSEL just like you would buy shares. This is also held in the demat form. Separate demat account (not the shares one) is required. You can redeem units from the exchange for gold bars. Commodities markets are not very well regulated. Until it matures you can stick to either gold ETFs or gold mutual funds. Look in Concepts section for elaborate details on the three methods discussed here.
We love to move with the times and technology. We've shifted from fat CRT TVs and big antenna cell phones to sleeker gadgets. We have loved the results. More can be achieved in shifting from traditional methods of gold investment to the evolved ones. So the next festival time or occasion refrain from buying more physical gold than you'd use and create a robust investment portfolio by periodically investing in gold mutual funds or gold ETFs.