Gold has always caught attention as investments. Festivals add to this charm as they form part of rituals to become top of items in the shopping list. In the given scenario people buy and consume gold in different ways. With advent of technology and development in financial markets, gold is no more jeweler dominated market. One can purchase it through various other means with advantages like purity & safety. But still the jewelers are not crying as people still like to buy/invest in gold through them. This article will enumerate the avenues available to invest in gold during this festive time.
Image courtesy of renjith krishnan at FreeDigitalPhotos.net
Before we move forward, it is worth mentioning that gold is an important part of any investment portfolio. But the quantity as any other asset class depends on your individual requirement, risk appetite and future goals. So we have already answered “How much to buy” in previous articles, this is an attempt to tell “How” to buy gold. Below is the list of various avenues available today to buy gold:
1. PHYSICAL GOLD
Physical Gold can be purchased through the below two sources
Jewelers: This has been the traditional source of buying gold since ages. The most common form of buying physical gold has been jewelry. The other forms available with the jewelers are gold coins, utensils, statues and bars. Indians are big consumers of gold when it comes to jewelry. Wearing gold is status symbol and many favor jewelry over coins or bar as gold can easily be converted to cash, new jewelry or may be coins. Gold in the form of jewelry should be purchased only for ornamental use and not for the purpose of investment as it loses value while converting to cash/gold in form of making charges. But still people favor it countering that they enjoy wearing it and showcasing status and for this a loss of 15-20 percent is not a deterrent.
Banks: Gold Coins and Gold bars are available now in mostly all the banks (SBI, ICICI, BOB to name a few). Very soon the marketing departments will call you for booking it as they have their own targets and figures have shown that banks have imported handsome quantity to sell to Indian buyers. (not sure about this year)
Now the question arises-whether to purchase physical gold from jewelers or bank?
Below is the comparison of gold purchased from jewelers and gold purchased from banks (with the advantages and disadvantages)
2. Monthly Investment Schemes managed by jewelers
Few jewelers manage monthly contribution schemes. Investor pay for the entire year and some jewelers also contribute 1 or 2 installments. These are of two types. In one variation one accumulates in terms of Rupees contributed and investor redeems as per the rate prevailing. In the second type the investor accumulates in grams. So here he can take advantage of the price fluctuations throughout the year and redeem when the prices are high. The advantage like an SIP it is disciplined way of investment and one can plan in advance. The drawback is that few jewelers compulsorily redeem in jewelry to earn on making charges. Conversion to coins/bars is not allowed. Also instant purchases cannot be done under these schemes.
Before moving to other options available to buy gold, the question arises should gold be bought in physical form or electronic form.The biggest disadvantage of buying jewelry in physical form is the need to keep it in safe custody as it carries high risk of theft. This feature makes electronic gold more attractive. Moreover, in electronic form, a person can purchase as minimum as 1 gram of gold which is not always possible in case of physical gold.
3. GOLD ETFs
Gold Exchange Traded Funds are very popular these days. These are mutual fund schemes that invest only in gold. Its units are held by the investors in electronic form. Generally, one unit of Gold ETF is equivalent to approximately one gram of Gold and hence its price is also approximately equal to one gram of gold. (there is some difference noticed in last few months) The minimum unit that can be purchased in Gold FTF is 1.The units of Gold ETF are traded on stock exchange and can be bought and sold like ordinary shares.
The biggest advantage is that one can be free from safety angle. ETFs are like securities which can change hands like other securities. And the disadvantage is the cost as broker charges both ways to buy or sell ETF units. Also if you open a demat account only to buy gold ETFs, the demat maintenance charges will also eat part of your gains. Also you will have no enjoyment of touching or wearing your investment.
E Gold was launched recently by the National Spot Exchange. (NSEL) E Gold too is an electric form of holding Gold with the only difference that here the investor is directly the owner of Gold whereas in Gold ETF the Asset management Company is holding the Gold on behalf of the investors – right now regulator allowed them to hold certificates also. (right now you may not be able to buy E-Gold)
Gold ETF and E Gold have slightly distinctive features which are listed below:
5. GOLD FUNDS
Gold funds have been launched by mutual funds as fund of fund scheme that invest in Gold ETFs. Below are the advantages and disadvantages of Gold Funds. Normally fund houses with ETFs have launched these funds.
6. EQUITY BASED GOLD FUNDS
Equity based Gold Funds are mutual fund schemes that invest in stocks issued by companies engaged primarily in mining, extraction, processing and marketing of gold. The idea is that gold is a natural limited quantity. If the gold is in demand the companies engaged in gold business will also gain from the demand. In India, there are very few listed companies (Like MMTC) associated with gold. Therefore these funds are essentially global funds and Indians can invest through the feeder fund which operates in India through the Indian Mutual Funds. These funds involve the following risks
- Equity risk
- Gold price risk
- Currency risk
Hence low risk seeking investors should not invest in these funds and look for other suitable options like Gold ETF/E Gold.
7. GOLD FUTURES
These are derivatives (F&O) where the underlying asset is gold prices. Dealing in gold futures requires knowledge of international commodities market and understanding how local commodity exchange works. This is a short term product mainly for trading in gold rather than investing. Hence, from the point of view investment, this product should be avoided.
If you ask me, the best preferred option is Gold ETF amongst the various alternatives. But I have seen that people are comfortable buying jewelry or coins as it suits their current consumption also. Share what do you feel on this and how are you planning to buy gold this festive season.