The best way to invest in gold

It's no secret that Indians are the largest consumers of gold. Come Dhanteras and we flock to the jewellers (or banks) to buy that token gram (or few grams) of gold. This, irrespective of prices.

But the options are far more now than there were a few years back. It's no wonder then, that retired Army Colonel Alok Govil, wants to invest in gold this year, but differently.

An avid reader and active Internet surfer, Govil doesn’t believe in leaving his investments to chance. He has a well-diversified portfolio of stocks, mutual funds and fixed deposits.

Govil has also put money in physical gold (trinkets for his wife and daughters). Now, he wants to invest in a gold ETF.

Before taking the plunge, he wants to know:

1. If gold ETFs score over physical gold?

2. If it is better to buy gold bars and coins from a jeweller or a bank?

Wealth answers his queries.

What are gold ETFs?

• A mutual fund scheme that invests in gold, which is held in paper or dematerialised form, just like stocks.
• Returns on gold ETFs are more or less same as that of physical gold.
• Investors get units for their holding in the gold ETF.
• Gold ETFs are listed and traded on the stock exchange.
• At present, there are five gold ETFs in India; one each by Benchmark, Kotak, UTI, Reliance and Quantum mutual fund.

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Why invest in a gold ETF?

It has various advantages such as liquidity, safety, tax benefits and is cheaper than buying physical gold.

“Gold ETFs provide an excellent investment opportunity”, says financial planner Kartik Jhaveri. He adds, “They are also more convenient than physical gold since you do not have to worry about storage, purity or insurance.”

How it’s better on the cost front:

Buying gold: Physical gold attracts making charges of around 15-20 per cent. In gold ETFs, you have to pay an entry load of up to 2.5 per cent if you buy units during the New Fund Offer (NFO). If you buy units once the scheme is listed, then only the brokerage charges apply. This can range between 0.5 to 1 per cent of your transaction value.

Recurring charges: For maintaining your jewellery, you might have to incur storage and insurance costs. Gold ETFs charge about 1 per cent every year as annual expenses.

Selling gold: While selling your jewellery, you may lose up to 25-30 per cent. Gold ETFs charge a brokerage of around 0.5 to 1 per cent when you exit from the fund.

And tax efficient too:

• While physical gold attracts wealth tax, gold ETFs do not.
• You will have to pay a dividend distribution tax (DDT), if and when your gold ETF declares a dividend. The present DDT rate is 14 per cent for individuals.
• Also, when you sell units held for a year or more, you qualify for the long-term capital gains tax (of 20 per cent). In physical gold, the holding period is three years to qualify for the LTCG tax.

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Gold coins and bars – bank or jeweler?

It’s a trade off between quality and buy-back facilities. Once sold, your bank will not buy the gold back from you. Though, you can be assured of the quality, if you buy gold from the bank.

Gold as investment

Historically, gold has been one of the most preferred ways of investing. But Jhaveri warns, “Do not look at gold as an investment tool. It is not equipped to give good returns. It can be used as a hedge against inflation. If you want returns, you can consider equity.”

Sanjay Matai, financial planner, also endorses these views, “While holding gold for the long-term may give you returns of 6-7 per cent per annum, equity can give returns up to 15-20 per cent per annum.”

To buy or not?

Gold ETF is a more viable option as compared to physical gold. However, you also need to factor in the charges involved.

Disclaimer: The contents of the article or are for information purpose only and are in no way meant to be advisory in nature. The author does not claim responsibility for actions taken by readers on the basis of the Article. Please consult your financial advisor for your personal money management.