Gold has always fascinated us Indians. Traditionally the only way to own gold was in form of Jewelry which was passed from generation to generation. These jewelries are commonly made of 22 Karat gold which means 91.6% gold.
Next, the fascination for pure gold lead to a market for 99.9% pure Gold coins and bars.
But still two major problems remained:
- It was unsafe to store gold
- The risk of being cheated on purity of gold
“Paper Gold” in the form of gold ETF, Gold Fund of Funds and e-gold came up with the solution to the above two problems. It is more convenient and safe to buy gold in paper form.
Three different ways to invest in Paper Gold:
Gold ETF (Exchange Traded Funds) are managed by Mutual Funds and trade like stocks on stock exchanges – NSE and BSE. As of now there are 14 Gold ETFs listed on Indian exchanges. These units are held electronically in the demat form. The NAV of the gold ETF changes according to the variation in gold prices. Investors do not incur any wealth tax and the income is taxed at a lower rate if the units are held for more than a year.
To be able to invest in gold ETFs, you need a demat account and a trading account with a broker. This involves account opening charges ( 500-750) and maintenance charges (up to 500 a year). There is also the fund management fee (or expense ratio, usually 1% per year), which gets deducted from the NAV of the fund, and the brokerage for the transaction (0.25%-0.5%).
Gold Fund of Funds:
If you don’t want to have a demat account and still want to invest in gold in paper form, Gold Fund of Funds (FOF) is the option for you. These funds invest in Gold ETFs and therefore their NAVs are indirectly linked to price of Gold.
The main advantage is that they offer the convenience of investing in gold through the SIP route. There is also no wealth tax implication. Similarly, the tax rate for long-term gains is flat 10% or 20% with indexation if these gold funds of funds are sold after one year of investment. However, these funds usually entail higher charges as they carry an additional expense ratio of 0.5%, which is over and above the 1% charged on the ETFs in the portfolio. Further, gold funds usually charge a 1-2% exit load if the investment is redeemed within a year.
Currently, Indian fund houses offer 11 gold FoFs (including two foreign FoFs), managing average assets of Rs. 4,700 crore as of March 2012.
Investors can purchase gold in electronic form via e-gold — a product launched by the National Spot Exchange Ltd (NSEL). It can be bought by setting up a trading account with an authorized participant in the NSEL. These are similar to gold ETFs in that each unit of e-gold is equivalent to 1 gram of physical gold and the e-gold units are fully backed by an equivalent quantity of gold kept with the custodian. Egold offers better liquidity than most gold ETFs and the pricing is also transparent. The transaction costs and brokerage involved in e-gold is also lesser than that for gold ETFs. E-gold also allows conversion to physical gold, but at a cost.
However, to invest in e-gold, investors need to open a new demat account, different from the one used for transacting in equities or gold ETFs (this would involve account opening charges). The tax treatment for e-Gold is same as that of Physical Gold. The benefit of long-term capital gains tax is only available after three years, unlike gold ETFs and gold FoF, where the same is available after one year. Also, as with physical gold, investors would be liable to pay wealth tax at 1% in case the total taxable wealth exceeds 30 lakh.
Go for e-gold if you are buying a large quantity of the metal. Small investors, who intend to buy 10-20 gm, will not benefit.
Below are two ways to invest in Physical Gold:
This is the most popular method to invest in Gold. This is more like consumption than investment as the wastage in terms of making charges and cut on returning of gold makes it inefficient form of investment. Also always buy hallmarked jewelry as you would get better valuation for the same and would be able to sell in most jewelry shops. Here is the Gold jewellery Buying Guide in India by BIS.
Gold Coins and bars:
This is 99.9% pure Gold and is sold both by banks and jewelers. But keep in mind banks don’t buy back the gold and also banks generally sell at premium to the jewelers. Always take the certificate of purity while buying these gold coins and bars.
Below is the table comparing all the above five ways of investing in gold:
|Features||Jewellery||Gold Coin & Bars||ETF||E-Gold||FOF|
|Offered by||Jewellers||Jewellers & Banks||Mutual Funds||National Spot Exchange||Mutual Funds|
|Storage / Holding Requirement||None. Some prefer Bank lockers.||None. Some prefer Bank lockers.||Demat Account||Demat Account||No Special Requirement|
|Pricing Transparency||Low Transparency. Jewellers may charge a markup on Gold Price, and also add high making charges.||Coins may have high markup due to making charges, packaging, etc.||Transparent as it is traded on the exchange||Transparent as it is traded on the exchange||Transparent and standardized|
|Ease of Selling||Jewellers buy back after deducting Heavy charges.||Jewellers buy back after deducting Charges. Banks do not buy back Gold.||Sold at Stock exchange at prevailing market price and directly with MF in multiples of 1 kg||Sold at Stock exchange at prevailing market price||Can be redeemed directly with the MF at day end NAV with exit load if applicable.|
|Annual Charges||None. Until you get Locker to store the same||None. Until you get Locker to store the same||1.5% expense ratio allowed. Add to this Demat Account cost||None as of now. Only Demat Account charges||1.5% expense ratio allowed|
|Transaction Charges||1% VAT on purchase||1% VAT on purchase||0.25% – 1% depending on broker||0.25% + Rs. 11 per Lakh||None|
|SIP||Jewellery buying schemes come close to SIP||None||Available through certain brokers||None||Available|
|Minimum Investment||Denomination & size depends on the Jewellery design & type.||0.5 grams||0.5 – 1 gram||1 gram||Rs. 5000 as minimum for first time investment. Rs. 1000 as SIP|
|Security of Asset||Investor Responsibility||Investor Responsibility||Fund House Responsible||Exchange responsible||Fund House Responsible|
|Impurity Risk||High Risk||Low Risk||No Risk||No Risk||No Risk|
|Wealth Tax||Applicable||Applicable||Not applicable||Applicable||Not applicable|
|Taxation on Price Appreciation||Upto 3 Yr STCG.3+ LTCG with indexation benefit||Upto 3 Yr STCG.3+ LTCG with indexation benefit||Upto 1 Yr STCG,1+ LTCG with Indexation benefit||Upto 3 Yr STCG.3+ LTCG with indexation benefit||Upto 1 Yr STCG,1+ LTCG with Indexation benefit|
Now that you are aware of all the ways of investing in Gold, go ahead, make a decision and indulge!