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Gold, as an asset class has clocked the highest returns in the past few years, compared to other asset classes. Today, investment decision in gold is not just determined by the prevailing price, but also by the mode of investment. Apart from the traditional mode of buying physical gold, there are other options like Gold ETFs, e-Gold, Gold Futures and Gold Mutual Funds. Let’s look at the most popular options:
Physical Gold: This is the oldest and the most popular mode of investing in gold. Physical investment in gold is either in jewellery or gold bars and coins.
Jewellery - Investing in jewellery has for long been the most accepted and preferred mode of buying this asset class. People generally buy jewellery and ornaments if there is an impending wedding in the family or during festival seasons. This automatically becomes your investment, as the value of the jewellery appreciates when the gold prices increase. Cash purchases above Rs. 5 lakhs attract tax at 1% of the purchase amount.
Advantages: It is the easiest mode of buying gold. You simply need to have the cash to buy gold.
Disadvantages: The biggest drawback when you buy jewellery is that you will have to pay the charges for making the jewellery, in addition to the market price of gold. In some cities like Chennai, the jeweller also collects a certain percentage towards the wastage he incurs. This works out to a huge additional cost. Storage of physical gold also becomes difficult, as the chance of theft is high. It is important to buy jewellery from a reputed jeweller, as it is very easy to mix some other metal and reduce the purity.
Gold Coins and Bars- You can buy gold in coin or bar format from any bank or jeweller. Available in different weights, these bars and coins can also be used at a later date to convert into jewellery if needed. All bullion purchases (other than coins below 10 grams) will attract VAT of 1% if the value of the purchases exceeds Rs. 2 lakhs.
Advantages: They are easily available at banks and jewellery shops. As it is generally not meant for regular use, you can store it in your bank locker. Unlike jewellery, you pay only the market price of gold and not any making or wastage charges.
Disadvantages: They are generally sold at a premium to the market price. When you want to sell them, you will again have to incur a loss, as it is generally bought in the market at a get a slight discount to the market price. You cannot sell the gold coins back to the banks, as banks do not buy back the gold coins sold. So your selling options are limited to that extent.
Gold ETFs: A gold ETF is akin to buying physical gold online and storing it in your demat account. You will need to have a demat account to purchase Gold ETFs. It is similar to investing in stocks. There are several Gold ETFs in the market today, and prices are usually benchmarked to the London gold price. Short term Capital Gains (STCG) tax is applicable if you sell your Gold ETF units in less than 12 months. Long Term Capital Gains (LTCG) tax of 10% without indexation or 20% with indexation, whichever is lower is payable, if you hold these units for over 12 months.
Advantages: You need not worry about the purity, storage and safety of your investments. You can even buy in small quantities - as low as 1 0.5 gram of gold. This is a liquid form of investment, as you can sell the Gold ETF and realise the proceeds within 2 working days. The good part is when you are selling the Gold EFTETF, you get the standard market rate that everyone gets. So there is a price transparency here. Gold ETFs do not attract wealth tax.
Disadvantages: As in the case of any other stock market investment, you will need to pay brokerage charges to your broker when you purchase Gold ETFs. You need to have a demat account to start purchasing Gold ETFs.
E-Gold: This is also an online mode of investment in gold. Started by the National Spot Exchange Limited (NSEL) in March 2010, E-Gold units can be bought and sold through this exchange. Although E-Gold is similar to Gold ETFs in many ways, the main difference is that you can convert your E-Gold units (1 unit is equal to 1 gram) to physical gold at a later date. The NSEL has designated delivery centres in Delhi, Mumbai and Ahmedabad, where the investor can take delivery of the physical gold in different denominations. If you wish to invest in E-Gold, you must open a demat account with one of the members of NSEL. You can view the list of brokers here. As regards taxation, STCG tax is levied if the E-Gold units are sold before 36 months. If held for over 36 months, E-Gold attracts LTCG tax of 20% after indexation. On conversion to physical gold, you will have to pay VAT at 1% as well as other local taxes, if applicable. The E-Gold units you hold is considered while calculating your wealth, and wealth tax of 1% is applicable if the net wealth exceeds Rs. 30 lakhs.
Advantages: Similar to Gold ETFs, e-Gold investors need not worry about the storage and purity of gold. The E-Gold units can either be converted to physical gold or can be sold as E-Gold units.
Disadvantages: E-Gold investments require the opening of a demat account specified by NSEL. If your existing broker is not in the list, then you must open a demat account with a new broker in your vicinity for this purpose. The value of E-Gold is included in taxable wealth of the individual.
Daily investment in Gold: This scheme was introduced by Reliance Money and is called My Gold Plan. In this scheme, you set aside a fixed amount every month (minimum initial subscription amount of Rs. 1000 and multiples of Rs. 100 thereafter) for a tenure ranging from 1 to 15 years. This amount is then split into equal parts and gold grams are purchased over 20 working days of the month. You can thus benefit from the daily rupee averaging of the price of gold. A low price gives you more gold grams and vice versa. The accumulated gold grams should be converted into gold coins or jewellery at the end of the tenure (called fulfillment). On fulfillment, the investor is required to pay VAT and local taxes, if applicable.
Advantages: This method is useful to accumulate gold in small quantities at periodic intervals. You can efficiently keep track of the gold grams you own, as statements are regularly available. You need not worry about the purity and storage issues as well. The scheme is flexible in the sense that you can convert your accumulated gold into gold coins or jewellery.
Disadvantages: Administration charges are very high at 1.5%, i.e.: the daily gold price is marked up by 1.5% before making the investment. If the delivery of coins or jewellery is not taken during the validity period, the customer needs to pay storage cost of 0.5% per annum till he takes delivery. At the time of fulfillment, taxes and coin making charges also need to be paid.
Gold Savings Schemes: These schemes are offered by jewellers across the country, wherein the customer is required to pay installments for a specified period. At the end of the period, the jeweler also contributes some cash, and you can purchase ornaments with the accumulated balance in your account. Eg: Tanishq runs a scheme where you pay 11 installments, and the jeweler pays the 12th installment. You can buy jewellery from Tanishq for the value accumulated at the end of this period, based on the market price prevailing on the date of purchase. On purchase, you will need to pay the same taxes, as applicable to purchase of jewellery.
Advantages: This scheme helps you to save regularly to plan for your investment in gold.
Disadvantages: You are forced to purchase gold at the prevailing market price. If the price of gold has increased over the period of your investment, you stand to lose. Usually you should also pay making charges for the jewellery you choose, which can be very high. In short, you are forced to agree to the seller’s terms, and this may not be the best mode of investing in gold.
Apart from the above modes, you can also invest in (a) Gold Saving Funds, which is a mutual fund which invests in gold companies and (b) Gold Futures (ideal for getting short term gains by trading, rather than for investment).
Which is the best option to invest in gold?
The form of investment depends on your need and time horizon. Buying Gold Jewellery is suitable only when you need it for a function or marriage in your house. If you wish to hold gold as an asset class, purely from an investment perspective, it is best to opt for Gold ETFs or E-Gold units.
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