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
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:
Discover the latest Business News, Sensex, and Nifty updates. Obtain Personal Finance insights, tax queries, and expert opinions on Moneycontrol or download the Moneycontrol App to stay updated!
