Physical gold or Paper gold......which one is good ?

From old days this yellow precious metal gold has been lured to the human being. Our country has been largest consumer of the gold. People buy it for festivals, religious sentiment or asset allocation in our country. Since last 12 year gold has witnessed straight gain in its price. According to IMF data in the month of march shows at least 12 countries boosted their gold reserves.

This year Akshay Tritiya sentiment, media hype, promotions and gift schemes could not boost the sales figure of physical gold and gold jewellery. However ETF gold, E-Gold and gold funds saw remarkable interest from various categories of investors. The ETF gold has saw increase in volume  compare with last year Akshya Tritiya figure. The exchanges were remained open till 8’o clock in night and done the Rs 600 crore plus volume.

Gold has proven to be a safe investment option because of it being a hedge against inflation. It has also low correlation with other asset classes, such as equity and debt. Gold has provided annualised returns of 19% over the past 10 years. There are two ways invest in gold, one is in physical form like jewellery, bar and other one is in paper form (dematerialised form) like ETFs, E-Gold etc. The main benefit of paper gold investment is that it is risk free from theft and storage. At present few paper gold options available in India:

Gold ETFs

These are passively managed exchange traded mutual funds that invest money in standard gold bullion. At present in India, assets managed under gold ETFs around  9,900 crore according to March 2012 data (this includes mark-to-market gains of 76% during the period). Due to traded on exchanges, gold ETFs provide high liquidity and transparency in prices. For investment in gold ETFs requires opening a demat account with a broker registered with exchange. You can easily view your gold ETF’s holding with the other stocks in demat account. You can purchase as little 1 unit (at 1 gram gold mkt price approx.) of gold ETF’s by instruct to you broker.

Gold Mutual Funds

These are fund of funds (FoFs) that invest the corpus in either their own gold ETFs or a foreign gold fund. Gold mutual funds provide investors the facility of systematic investment plans (SIPs), wherein they may invest in gold regularly and avail benefits of rupee cost averaging, i.e. buying more units when prices are low and less units when prices are high. At present indian fund houses offer 11 gold FoFs (including two foreign FoFs), managing average assets of . 4,700 crore as of March 2012. It also gives retail investors an opportunity to invest in paper gold in amounts as small as Rs. 500 via SIPs and without having to open a demat account .

E-GOLD

In our country investors can purchase gold in electronic form the National Spot Exchange (NSEL).Investors can buy and sell gold in denominations as small as one gram in e-gold form. A major advantage of e-gold is the investor gets an option to convert paper gold into physical gold with all the advantage of investing in gold in the dematerialised form. The operating expenses to run e-gold is very low compare with other options like E-Gold and ETFs.

Tax liability

Gold ETFs and gold FoFs are subject to long-term capital gains (LTCG) tax of 10% without indexation and 20% with indexation if held for more than a year and taxed as per individual income tax slabs for short-term capital gains (STCG) if held for less than one year. LTCG is taxed at 20% in case of physical gold and E-gold and investors need to hold them for more than three years to qualify for the same. STCG is taxed as per the individual tax slabs if sold within three years. In addition to this, wealth tax of 1% of the market value of the assets exceeding 30 lakh is charged on investment of physical gold and e-gold.

Gold as an asset class provides strong hedge against inflation and also gives an opportunity to maximise wealth over a longer timeframe. It is less voletile compare with other asset class. In the short-term, gold prices can be volatile due to demand-supply concerns and economic conditions. The percentage allocation to gold would be depend on an investor’s risk appetites and return objectives. So investment in paper gold more good option compare than physical gold

(Dear readers if you have some query about any financial product please feel free to ask. You are most welcome for your feedback and question.)

Regards,

Arvind Trivedi

Certified Financial Planner