Investing in gold funds vs buying gold jewellery: Which is smarter?
Gold has worked as a tool to tide over monetary emergencies and provided a commercial support system.
With time, gold has evolved - it can be owned two ways - paper [gold exchange traded funds (ETFs) and sovereign gold bonds (SGBs)] and physical (jewellery, coins, bars etc). Then there are gold mutual funds, which help you further invest in gold ETFs. There also exist gold MFs which get invested in international gold mining companies’ shares.
Get gold coins delivered at home
With gold coins available online on e-commerce portals like Amazon India, Paytm, Snapdeal, fewer people are going to the neighbourhood jeweller to buy them. Add to it the ease of doorstep delivery that these websites offer. Also, coins seem to be a more popular choice as compared to jewellery for the concerns of safety, high costs, and outdated designs with the latter. The making charges on gold jewellery, which typically range between 6 percent and 14 percent of the cost of gold (may go as high as 25 percent in case of special designs) are irrecoverable.
With the government launching ingeniously minted coins in denominations of 5 and 10 grams and bars for 20 grams, one can buy them from jewellers, banks, non-banking finance companies, and now even e-commerce websites. The Indian Gold Coin is the first-ever national gold coin promoted by government and hallmarked by BIS. It also carries advanced anti-counterfeit features and tamper-proof packaging.
Another popular savings scheme is where you can deposit a fixed amount every month for the chosen tenure and buy gold from the same jeweller at the end of it. The value is correspondent to the total money deposited, including a bonus amount - mostly a month’s instalment from the jeweller or a gift item. This conversion is done at the gold price prevailing on maturity.
Related: 5 Gold schemes offered by Jewelers and how they work?
'Digital Gold', offered on the mobile wallet platform of Paytm and 'GoldRush' is offered by the Stock Holding Corporation of India on their website, while Motilal Oswal has launched Me-Gold, a digital gold online investment. All of these are offered in association with MMTC - PAMP, (a joint venture between public sector MMTC and Switzerland's PAMP SA).
Gold ETF is an alternate way of owning paper gold
A cost-effective manner of owning paper gold, the buying and selling happens on a stock exchange (NSE or BSE) with gold as the underlying asset. A big advantage is transparency in pricing - the buying price being closest to the actual gold price, making physical gold price the benchmark. All one needs is a trading account with a stockbroker and a Demat account, and then one is ready to either buy in a lump sum or even at regular intervals through systematic investment plans (SIP).
One may incur no entry or exit charges but other costs with gold ETFs
- The expense ratio (for managing the fund) which is generally low compared to other mutual funds and is around 1 percent.
- The broker cost that needs to be accounted for every time you buy or sell gold ETF units.
- The third is technically not a charge but impact returns as tracking error. It arises because of the fund's expenses and cash holdings thus not mirroring actual gold price.
Related: Difference between E-Gold and Gold ETF’s [Infographic]
Sovereign Gold Bonds are issued by the government
Another way of owning paper gold, SGBs are available through a window intermittently opened by the government for fresh sale to investors. The window is open for about a week every two-three months. In case someone wants to purchase SGBs anytime in between, they may buy earlier issues listed in the secondary market.
So, what type of gold should one invest in?
Unlike other forms of gold, physical gold is one of the few assets which can be kept completely private and confidential. It can be bought without involving a broker or any other intermediary to fulfill the contractual obligation of purchase.
Investors can look at avoiding the initial cost of owning physical gold, which is somewhere around 10 percent, by buying SGB and Gold ETF, both paper-gold, and cost-effective. There is no entry cost in SGB while costing for gold ETF could be around 1 percent.
While SGBs benefit investors who want to plough money into gold for a longer period, gold ETF provides much better liquidity than SGB. The maturity of SGB is after 8 years, although the lock-in ends from the fifth year. Owing units is much easier in ETFs than SGB as the former is entirely online. The risk of owning, holding also doesn't exist in both.
But when it comes to considering a big difference, it has to be on the taxation front. And investor doesn't have to pay tax on the gains in SGB but the earnings from gold ETFs after 3 years are subject to 20 percent tax deduction after indexation. One disadvantage with gold ETFs is that the units won’t yield an additional interest 2.5 percent every year as SGBs do.
When investing in gold, one should not have more than 10 percent of the total portfolio in gold. Choose between Gold ETFs or SGBs depending on how comfortable you are managing investments online and keep the worries of purity, security aside. Here are the factors that affect gold prices in India.