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You are here : IndiaNotes >> Market Action >> Commodities >> Gold [Sona]

How to invest in gold in India

Vikas Sonigara | 23 May, 2013  | Follow Author | Add to my Favourites 
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With the recent fall in prices of gold from ~Rs 30,500/- per 10 gm to Rs ~26,500/- per 10 gm, there has been a huge rush to purchase gold and hence I thought of writing a series of articles on gold. To begin with, I will write on what are the options of purchasing gold in India and pros and cons of these.


Broadly, gold can be purchased in 4 ways in India -



1. Physical Gold

One can buy physical gold from a reputed jeweller. This can be bought as bars/coins of pure gold or as jewellery. Now-a- days most banks also sell gold coins. Buying physical gold has high transactional costs and also if bought from a non-reputed jeweller, it also has risks in terms of getting duped on purity of gold.


2. E-Gold

E-gold is ‘electronic -gold’ and is held electronically in the demat form. In India, e-gold is offered by the National Spot Exchange Limited (NSEL). An investor needs to register as a client with any NSEL member (just as one does for trading on BSE/NSE through BSE/NSE members/brokers).

Once purchased, a person has the option of converting the e-gold into physical gold. The minimum quantity of conversion is 1 gm.


3. Gold ETFs (Exchange Traded Funds)

Gold ETFs are exchange traded funds (traded on BSE/NSE) that have an investment objective to generate returns that are in line with the performance of gold. The underlying investment class of these funds is Gold bullion (90-100%). Some portion of cash in these funds is also invested in Debt Securities and Money Market Instruments (0-10%) for meeting liquidity requirements. Unit of ETFs can be easily traded like any other shares through a broker during the market hours. The minimum investment for a Gold ETF is one unit of gold i.e. ~1 gm of gold. Generally an ETF will charge the investor 1-1.5% as fund expenses (fund management fee, sales costs etc)


4. Gold Funds (Mutual Funds):

Typically in an ETF, one needs a demat and trading account to transact. If one doesn’t have these, one can still invest in gold ETFs via Gold Funds. Gold funds are fund of funds where the fund would invest in an underlying ETF e.g. HDFC gold fund would invest in HDFC gold ETF.


This means that the Gold Fund would have an investment strategy of investing 90-95% of its corpus in an ETF and remaining 5-10% in some liquid instruments to meet redemption obligations


The advantage of this to the investor is that, he/she can now invest in gold like normal mutual funds and can also avail automatic SIP facility (which is not possible in ETF).


Of course all of these would come at a cost i.e. Expense costs of the Gold Fund which is typically 0.5-1%. Hence when you invest a gold fund, you end up paying 1% cost for the gold fund and also indirectly 1-1.5% cost for the gold ETF which the gold fund buys.


Please note that a gold fund is different from a gold mutual fund which primarily invests in companies involved in gold mining, processing, fabricating, and distributing gold.



Whatever the route may be chosen one must consider various factors like transactions costs, liquidity, safety and taxation before choosing the route to invest.


The table below gives a brief about a few such factors:


 

Physical Gold

E-Gold

ETFs

Gold Funds

Form held

Physical

Electronic - Demat

Electronic - Demat

Electronic - Mutual Fund Units

Demat Account Required

No

Yes

Yes

No

Trading Account Required

No

Yes

Yes

No

Transaction Costs

       

Making Charges

Yes
- Typically 1-10%
1%- Pure Gold Bars/Coins
2-10% - Jewellery

No

No

No

Fund Expenses

No

No

Yes
Typically 1-1.5%

Yes -

Typically 1-2%
1-1.5% for underlying ETFs
0.5-1% for Managing Gold Fund

Trading Brokerage

No

Yes
Typically 0.25-0.5%

Yes
Typically 0.25-0.75%

No

Taxation

       

STCG Tax

< 3 years

< 3 years

< 1 year

< 1 year

LGCG Tax

> 3 years

> 3 years

>1 year

> 1 year

Wealth Tax

Yes (above 30L)

Yes (above 30L)

No

No

Cost of Storage

Yes (e.g. Bank Lockers)

No

No

No

 


STCG – Short Term Capital Gains Tax – As per your personal income tax slab


LTCG – Long Term Capital Gains Tax – Flat 10% or 20% after indexation


From the above it is clear that investing in gold funds is the simplest and most suitable for small investors. However this comes at an additional cost.


Investing in gold ETF is one of the best option for someone who is conversant with trading and his existing demat/trading account can be used and no separate trading account needs to be opened (as required for e-gold).


Physical gold is risky and high making charges are involved. Hence if one is not planning to buy gold for self consumption (jewellery), my personal recommendation would be to go for ETFs or gold funds.


Happy investing!




About Vikas Sonigara
The author, an alumnus of IIT Roorke, has been an active investor for the past 15 years.He blogs about financial markets and various financial products at www.finfundaz.com His articles aim to help audiences make informed and rational financial decisions.

The author can be contacted at [email protected]

Disclaimer: The author has taken due care and caution to compile and analyse the data. The opinions expressed above are only the views of the author, and not a recommendation to buy or sell. The author does not accept any liability whatsoever arising from the use of any of the above contents.



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