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Paper gold shines the best

If you are looking for gold as an investment option, then gold mutual funds, exchange-traded funds, sovereign bonds are superior bets

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Dussehra and Diwali are just around the corner and many will be rushing to buy gold. Given India’s obsession with the yellow metal, many will buy it, even if it’s only a small quantity. 

M Barve, a Mumbai -based independent financial advisor says, “People buy gold for various reasons, for personal consumption, as an investment; though returns have been volatile at times. They buy it as a hedge against inflation, and for the stability it provides to the portfolio’s returns when other types of assets are doing badly.” 

Irrespective of the reason for buying gold, it’s important you buy it in a way that suits your need the best. Here are five ways to buy gold.  

Ornaments

One of the most popular ways to buy gold is in the form of jewellery. A Shah, a Mumbai-based financial planner says, “Unless you are buying for personal use, buying gold as ornaments is not recommended. You have to pay making charges, it could be costly, safety is a concern, you have to rent bank lockers to store it.” 

GOLDEN TIPS

  • With ETF there’s direct investment in gold, with gold MFs it’s like investing in companies in the gold business
     
  • Best gold investment is sovereign gold bonds were capital gains tax arising on the redemption of SGB to an individual has been exempted
     
  • One rule of thumb is to limit gold to no more than 5% to 10% of your portfolio
     
  • When it comes to buying gold look at various parameters such as cost, purity, safety, storage, tax and returns
     
  • If you are looking for gold mutual fund, choose gold exchange-traded fund over gold funds

Making charges on gold jewellery typically ranges between 6% and 14% of the cost of gold (may go as high as 25% in case of special designs, and ultimately designs become outdated). Unless it’s for personal consumption don’t buy gold as an ornament.

Coins or bars

Gold coins can be bought from jewellers, banks, non-banking finance companies and online. The coins are available in denominations of 5 and 10 gram while the bars will be for 20 gram. The concerns here are similar to buying gold via ornament route; safety, high cost, purity and the like. In fact, you will have to shell out more money if you want to buy gold which comes with the certificate of authenticity, stating the purity of gold on it. 

Most gold sellers or reputable jewellers, banks sell gold coin/bar which comes with Hallmark status and with an international Assay Certificate of 999.9 purity standard and tamper proof packing. The Bureau of Indian Standards certifies hallmark gold coins, and bars too. When you buy hallmark gold and certified gold coins/ bars is as high as 5% to 20%, with banks and branded jewellers.

Gold funds

Gold is available in a paper form, via the mutual fund route. Buying/selling a gold fund is very similar to investing in any mutual fund scheme. The gold funds don’t invest in gold directly, rather in companies involved in mining in gold. You don’t need a demat account for investing. There is no risk of theft. You can invest small amounts via a Systematic Investment Plan (SIP). 

Barve says, “Remember since they invest in companies which are involved in the gold business, gold mutual funds are suitable only for investors who have a risk appetite and a knack for the stock market.”  

Gold exchange-traded funds

This is one of the easiest ways to buy gold, as you can buy gold electronically in demat form. Usually, one unit of gold is equal to one gram. You need a demat account to buy gold in this form since it is traded on the exchange. Most importantly, you get access to one of the purest form of gold as fund houses hold gold of standard bullion purity of 99.5%. You can buy in lump sum or even at regular intervals through SIP. You may even buy one gram of gold. Keep in mind fund management charges which can be around 1%.

Sovereign Gold Bond (SGBs): 

These are government-backed securities denoting investment into gold. The SGBs 2019-20, Series V will open for subscription from October 7-11.  SGB is a certificate scheme in which the Reserve Bank of India (RBI) issues bonds on behalf of Government of India. 

The issue price of the bond during the subscription period will be Rs 3,788 per gram and The RBI will be offering a discount of Rs 50 per gram on the original value to investors applying online. The bonds are denominated in multiples of gram(s) of gold with a basic unit of 1 gram. The tenor of the bond is for a period of eight years with exit option after the fifth year to be exercised on the interest payment dates. 

The bonds bear interest at the rate of 2.50% (fixed rate) per annum on the amount of initial investment. Interest will be credited semi-annually to the bank account of the investor and the last interest will be payable on maturity along with the principal.

How to choose

When it comes to gold buying you have to look into various parameters. Like cost, purity, safety, storage, tax and returns. Barve says, “If you want to buy for personal consumption by gold as jewellery, you can’t wear a ETF around your neck. If you are looking for gold MF, choose gold ETF over gold funds. With ETF there’s a direct investment in gold, with gold MFs it’s like investing in companies in the gold business.  The best, however, is SGB. The capital gains tax arising on redemption of SGB to an individual has been exempted.”

Remember experts warn that you should be wary of how much gold to include in your portfolio. One rule of thumb is to limit gold to no more than 5% to 10% of your portfolio. 

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