Don’t buy gold, invest in gold this Diwali: Chirag Mehta of Quantum Mutual Fund
While gold jewellery is bought and used for its aesthetic value, it is ineffective as an investment option. This is because of the loss in value on resale.
It’s that time of the year again when people flock to the streets to grab a piece of the yellow metal to either add a touch of auspiciousness to Diwali or to add some glitter to an upcoming wedding.
But in their eagerness, very often buyers tend to splurge on gold jewellery or gold coins by convincing themselves that they are investing rather than spending as the value of the holding is likely to increase in the future. While the justification isn’t entirely incorrect, it lacks some important considerations.
Gold jewellery – a dull investment option
While gold jewellery is bought and used for its aesthetic value, it is ineffective as an investment option. This is because of the loss in value on resale. The making charges on gold jewellery, which typically range between 6-14 percent of the cost of gold (and may go as high as 25 percent in case of special designs) are irrecoverable. Also, the 3% GST paid on gold jewellery cannot be recovered on resale.
In this context, one may feel that gold coins and bars are better suited for investment. However, it should be noted that the purchase of gold coins and bars comes at a significant premium of about 5-15% over and above the gold prices. This amount plus the GST paid remains irrecoverable on sale. Also, the lower the denomination you purchase, the higher is the premium.
Smarter ways of investing in gold
Increasing awareness on the drawbacks of physical gold as an investment option has made people switch to Gold Exchange Traded Funds (ETFs) and Sovereign Gold Bonds – the smarter ways of investing in gold.
Gold ETFs are mutual funds that invest in physical gold. Each unit of a Gold ETF represents 1 gram of 24 carat physical gold. Investors in Gold ETFs do not bear making charges or storage costs associated with physical gold holdings. Moreover, Gold ETFs are traded on the exchange at the prevailing market price of physical gold, which implies that investors can buy or sell their holdings at close to the market price, without worrying about paying a premium on purchase or selling at a discount.
Sovereign Gold Bonds are government-backed securities denominated in grams of gold. Investors in Sovereign Gold Bonds are assured of market price of gold at the time of purchase and redemption.
Gold ETFs vs Sovereign Gold Bonds
At the outset, Gold ETFs and Sovereign Gold Bonds may seem similar. However, there are a few differences which are highlighted below:
Mathematically, Sovereign Gold Bonds may seem more rewarding than Gold ETFs; however, investors need to consider additional factors such as:
To summarize, the inefficient preference for holding physical gold has prevented investors from optimizing their gold investments. Not only do you end up paying a high price for this obsession (in the form of taxation, storage costs, making charges, high premiums, discounted resale values), but it is also prone to impurities and theft.
Financial forms like gold ETFs and SGBs are more efficient avenues for investment, with the ETF scoring over the SGB thanks to its 24 carat physical gold backing.
(Chirag Mehta, Fund Manager - Alternative Investment, Quantum Mutual Fund)