Why you shouldn't write off gold yet?

Gold has been a favourite with Indian investors for decades now. With the returns that the yellow metal has delivered in the last five years, it is not difficult to understand why investors have been flocking to it.

Sample this: In the last three years, gold has given a return of 51.9 per cent as compared to Sensex that has delivered 13.8 per cent. If we take the ten year time horizon, then gold has given 377 per cent returns as compared to 243.83 per cent that Sensex has delivered. However, in the five year time period Sensex has managed to beat gold returns. Despite that, gold delivered over 100 per cent vis-a-vis Sensex that gave 130 per cent. In the same period, if you take fixed deposits then they would have had delivered a return of anywhere between 45-50 per cent (assuming that the yearly returns vary between 9-10 per cent). The yellow metal has managed to deliver such returns even when the metal recorded its biggest annual loss in 2012, in the last 32 years. Internationally, the prices slid to $1188.68 per ounce in December last year from its all time high of $1900.23/ ounce and that is when people had begun to tick off gold.

However, the yellow metal has gained over 10 per cent in the last two months and is hovering around $1313/ounce levels. So, it may be early to write off gold.

Should you invest?

Gold is also used as a great diversification tool. Financial advisers suggest that investors must allocate a certain percentage (limited to 5-10 per cent of your overall investments) of their portfolio in gold.

How to invest?

In India, buying gold via the physical route is the preferred option for investors. However, this may not be the wisest option. It's best to buy bars and coins instead of jewellery when buying gold via the physical route. For jewellery you need to pay making charges which can vary anywhere between 2-25 per cent depending on the intricacy of the jewellery. This price will be discounted for if you intend to sell the jewellery. This then may not be the best option. Experts suggest that better options to invest in would be gold ETFs, gold mutual funds and E-Gold.

Physical gold

Gold ETFs are passively managed funds that track gold prices. The expense ratio of these funds are lesser than most other mutual funds and hence, the returns are expected to be as close to the underlying asset. On the other hand, gold funds are mutual funds that invest in the same asset management company's gold ETFs. They do not require a demat account to be maintained and are therefore easier to invest in. However, there involves two expense ratios– their own fund management expense as well as of the ETF they invest in. Hence, theoretically, their returns cannot exceed those of the underlying ETFs.

E-gold, as the name suggests, is an electronic form of gold investment for which one needs to open a demat account with any of the depository participants of the National Spot Exchange. It is the most cost-effective form and is able to mimic gold prices more closely than ETFs or gold funds.

Experts say that for most retail investors, investing via the ETF route may be a better option than gold funds or e-gold. This is because ETFs have a lesser expense ratio and are able to mimic gold prices more closely. Retail investors can use the systematic investment plan (SIPs) for investing in ETF or gold funds.

E-gold makes sense for investors only if they are buying large quantities. This is because a separate demat account needs to be opened for this, moreover the long term capital gains tax will be applicable only after three years unlike ETF or gold funds where it comes into effect after one year.

Going ahead, analysts expect more investors to contribute via the physical route. “Over the years people have realised that investment is gold is an important way for portfolio diversification. With more people learning about how ETFs score over physical gold, we expect a greater traction even this years,” says Chirag Mehta, Fund Manager at Quantum Mutual Fund.

The author is a writer with dna Money