Give your portfolio a gilded edge with paper gold

In India, gold is at once a marker of wealth that is accumulated and passed on from generation to generation, and a ceremonial adornment taken to reflect one's social status. Predictably, investments in the asset class have tended to skew towards jewellery rather than bullion.

That stands India apart from the global trend, where gold is considered a safe-haven bet. Investment portfolios treat the yellow metal as just that – bullion holding to protect one's wealth rather than grow it.

Ideally, gold should be treated as a bit of both – an investment that offers an assurance of safety (wealth protection) as well as glitter (read returns, especially when some inclement turn in financial markets sends risk aversion in other asset classes soaring).

Gold enjoys a lower correlation with other major asset classes such as equity and debt. This is why it acts as an effective hedge when the financial markets turn choppy.

Indian investors today have a number of options through which to take exposure to gold. While the love affair with gold jewellery continues, an increasing number of people have taken to new and efficient instruments that have appeared on the scene in recent years. Among these are the gold exchange-traded fund (ETF), fund of funds (FoF), sovereign gold bonds and the government's gold monetisation scheme – together referred to as paper gold.

Each of these instruments brings to the table its own set of benefits and risks. Hence, it is imperative that one chooses the instruments carefully to stitch together an efficient portfolio.

Paper gold obviates the need to buy physical gold and then have to worry about its purity and safe keep. What's more, tax incentives offered in the latest Union Budget have further added sheen to the recently launched sovereign gold bonds and the gold monetisation scheme.

Gold ETFs

Passively managed mutual funds that invest in standard gold bullion (99.5% purity).
No upper ceiling, minimum investment equivalent to 1 unit.
No lock-in period.
Highly liquid and transparent, as the investor can sell units on exchanges.
Investors can buy regularly and reduce the overall risk, aided by rupee-cost averaging via systematic investment plans (SIPs).
Investors need to pay fees for fund management and demat facilities and other related charges.
Taxed as per individual tax slabs before three years; long-term capital gains tax at 20% post-indexation after three years.

Gold fund of funds

FoFs invest either in their own gold ETFs or a foreign gold fund, which is the mother fund.
Unlike gold ETFs, investing in gold funds does not require opening of a demat account.
No lock-in period.
Investor can invest regularly via SIPs.
Investor needs to pay expenses towards fund management fees.
Taxed as per individual tax slabs before three years; LTCG tax at 20% post-indexation after three years.

Sovereign gold bonds

Issued by the RBI on the behalf of the government; can substitute physical gold.
Investors have to pay the issue price in cash; bonds will be redeemed in cash on maturity.
Minimum investment of two grams, maximum buying limit of 500 grams per person per fiscal year.
Lock-in period of eight years with early redemption allowed after the fifth year from the date of issue on coupon payment dates.
Investment possible only when the issue is open and not via SIPs.
SGBs can be sold on commodity exchanges, if held in demat form. However, liquidity can be low.
No expense is involved.
Investors can earn an interest of 2.75% per annum on the initial investment.
Proposed no capital gains tax at the time of redemption (maturity); LTCG from the sale of bonds will be taxed at 20% post-indexation after three years, but before maturity.
Interest is taxable.

Gold monetisation scheme

Ideal for investors wanting to convert physical gold to paper gold and also earn fixed income returns along with tax benefits.
The scheme is aimed at mobilising gold held by households and institutions; channelise towards productive use and reduce reliance on gold imports over the long run.
Principal and interest on the deposit to be denominated in gold.
Gold to be monetised will be first checked for purity at any of the 350 BIS-certified hallmarking-cum-collection centres.
Minimum deposit - 30 gram of gold, with no maximum limit.
Tenure available - short-term (1-3 years), medium (5-7 years) or long-term (12-15 years). Withdrawal allowed after three years in medium term deposit and after five years in long term deposits, subject to a reduction in the interest payable.
The depositor will have the option to redeem the principal amount either in gold or equivalent rupee terms. However the interest will be paid in cash only.
Investor can earn additional interest rate of 2.25% and 2.20% for medium and long term deposits respectively. Short-term deposits' rate to be determined by bank.
Regular investment not available.
No expense is involved.
Proposed no tax on capital gain and interest.

The writer is director funds and fixed income research, CRISIL Ltd