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Looking out to invest in Gold? Go for paper gold!

With the shifting sands of time, Gold has evolved as an important asset class and is made available in various forms for investing. Read this space to know the various available while investing in Gold.

May 05, 2012 / 12:14 PM IST
Gold has been treasured as a valuable commodity for as long as one can remember. With the shifting sands of time, it has evolved as an important asset class. From barter trade to jewellery investment and now paper gold, the sheen continues and its universal appeal is intact. Gold has proven to be a safe-haven investment option not only because of it being a hedge against inflation but also due to its low correlation with other asset classes such as equity and debt. Gold has provided annualised returns of 19% over the past 10 years vis-à-vis 17% by the S&P CNX Nifty. It has also given positive returns for every calendar year for over a decade. In India, where gold buying is an integral part of social and religious customs, investors now have the option of buying gold in dematerialised or paper form. Paper gold not only offers the convenience of holding the yellow metal in an electronic form with greater price transparency and purity but also negates the risk of storage and theft. Further, with the launch of the CRISIL Gold Index, investors now have a standard benchmark for gold prices in India.

Three paper gold options in India

Gold ETFs - are passively managed mutual funds that invest in standard gold bullion (99.5% purity). Investment in gold ETFs requires opening a demat account with a broker registered with the Bombay Stock Exchange (BSE) or the National Stock Exchange (NSE). The expense structure for gold ETFs is in the range of 0.5-0.75%.

Check out the performance of Gold ETFs

Gold mutual funds - are fund of funds (FoFs) that invest the corpus in either their own gold ETFs or a foreign gold fund which is the mother fund. Gold mutual funds provide investors the facility of systematic investment plans (SIP) 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. The expense structure for gold FoFs is in the range of 1.5-2.25%.

E-gold - is a product launched by the National Spot Exchange Limited (NSEL wherein gold can be purchased in the electronic form in denominations as small as 1 gram and can also be converted into physical gold

Close

Why is gold popular?

Hedge against inflation - Gold has demonstrated its ability to generate returns higher than inflation and thereby acting as a strong hedge

Safe haven investment - Gold is considered as a safe haven asset to invest in times of uncertainty on two counts, one, it has given positive year-on-year returns in the past 11 years and two, other asset classes have been more volatile with equity, debt even giving negative returns in some years .
Table  1  Performance  of  gold,  equity  and  debt

Asset  Class

2001

2002

2003

2004

2005

2006

2007

2008

2009

2010

2011

Gold

4.82

23.27

15.77

0

21.41

21.77

17.15

28.04

20.99

23.44

32.53

Equity

-16.18

3.25

71.9

10.68

36.34

39.83

54.77

-51.79

75.76

17.95

-24.62

Debt

25.25

21.66

11.54

-2.87

5.71

5.01

6.8

23.22

-6.37

6.18

5.05

 

 

Calendar year point to point returns 

Gold returns calculated from LBMA (London Bullion Market Association) prices converted to Indian Rupees

Equity returns calculated for S&P CNX Nifty index, Debt returns calculated for CRISIL Gilt index

Years marked in red indicates bearish phase in equity market

Diversification - Gold as an asset class offers twin benefits: diversifies an investor's portfolio and limits the downside risk in times of uncertainty. As reflected in Table 1, gold has provided the highest returns in four out of the five years in the bear phase indicating the superiority of the asset class in times of equity market turmoil. Further, Table 2 shows seven scenarios of investing across asset classes - equity, debt, gold over a 10-year period. While a singular investment in gold (Portfolio F) has given the highest returns of 19%, it goes against the thumb rule of portfolio diversification. In the composite portfolios, the highest returns of 18% were delivered by quity and gold (Portfolio D). Further, the most diversified Portfolio C (equity + debt + gold) performed better than Portfolio E (equity + debt), which shows adding gold helps earn better returns and reduce downside risks.

 

Portfolio

Asset class

Investment in  2002

10-year Returns

Profit earned  

Value in  2012

A

Debt

30,000

7%

27,704

57,704

Total

30,000

7%

27,704

57,704

B

Debt

15,000

7%

13,852

28,852

Gold

15,000

19%

67,731

82,731

Total

30,000

14%

81,583

1,11,583

C

Equity

10,000

17%

36,890

46,890

Debt

10,000

7%

9,235

19,235

Gold

10,000

19%

45,154

55,154

Total

30,000

15%

91,279

1,21,279

D

Equity

15,000

17%

55,335

70,335

Gold

15,000

19%

67,731

82,731

Total

30,000

18%

1,23,066

1,53,066

E

Equity

15,000

17%

55,335

70,335

Debt

15,000

7%

13,852

28,852

Total

30,000

13%

69,187

99,187

F

Gold

30,000

19%

1,41,416

1,71,416

Total

30,000

19%

1,41,416

1,71,416

G

Equity

30,000

17%

1,10,670

1,40,670

Total

30,000

17%

1,10,670

1,40,670

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Tax implication on various forms of gold investment

Gold ETFs and gold FoFs are subject to long-term capital gain (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 Rs 30 lakh is charged on investment of physical gold and E-gold.

Conclusion

Gold as an asset class plays a very important role in an investor's portfolio as it not only provides stability to returns but also gives an opportunity to maximise wealth over a longer time frame. Further, moving from purchasing physical gold to buying gold in paper form through mutual funds has its own advantages of transparency in pricing, purity, convenience as well as no storage risk. However, in the short term, gold prices can be volatile due to demand-supply concerns and economic conditions owing to which investors need to adopt SIPs over longer time frames of five years and beyond. The percentage allocation to gold will depend on an investor's risk and return objectives.Content partner:

 
first published: May 3, 2012 11:12 am

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