Manikaran Singal
No Indian wedding can be imagined without gold. In fact gold always gets special treatment and specific budget allocation in wedding expenses. Indians use gold in the form of jewellery for personal use and sometimes in form of gold coins as gifts to family and friends.
Besides jewellery and coins, gold can also be bought in electronic form through Exchange Traded Funds (ETFs). This form of purchase lets the buyer invest in gold in electronic form and accumulate units of gold which can be sold later on to buy physical gold.
Now the question arises, when the goal is to use gold as jewellery for a family wedding, with the availability of so many options, what makes the most sense? How one should plan towards gold purchases and which option is better to accumulate gold for wedding ceremony, especially when wedding is due 2-3 years or more down the line.
While deciding one has to weigh different gold buying options on the basis of convenience, security, purity, taxation and cost effectiveness.
One thing is for sure that when there is significant time lag in purchasing and usage of gold, it should not be bought all at once. As gold is a global asset class, its prices are dependent on many domestic and global factors, and they vary on a day to day basis. Staggered buying leads to averaging out of costs.
This time lag between purchase and usage is also one of the factors to decide if gold to be bought in jewellery form or not. If there is a huge lag, jewellery designs might go out of fashion by the time one uses it. Thus there is no point in paying the making charges which range between 10-35% in the beginning. You might end up paying double for this if you decide to get the jewellery redone later.
Another option that one may consider, is buying gold coins in small quantities like of 5gm/10gm and convert those into jewellery as and when required.
Gold coins sold by banks, cost 5-10% higher than market price due to distribution costs payable to the banks. These coins come under sealed packaging with assay certification, thus the purity of these gold coins is unquestionable. Same goes for gold bricks. The coins and bricks can be bought from jewellers also, but there could be doubt on the purity aspect.
One has to understand that buying gold in physical form needs some security arrangements too. Depending on the quantity of gold you intend to buy, you have to rent a bank locker and pay annual charges. If kept at home you need to take requisite insurances to cover the risk of theft and burglary. There is also the inconvenience and transit cost attached to regular buying of coins/jewellery and depositing the same in the locker. You may also not be able to buy small quantities like of 1 gm/2 gm.
To answer this issue there’s another way one can invest in gold and that is electronically through ETFs (Exchange Traded Funds).
ETFs are traded in stock exchanges with underlying asset as gold. You can buy as small as 0.5 gm of gold through ETF and keep it in your demat account. Practically this is investment in gold eliminates the worry on the purity part. This lets you accumulate small quantities and you can sell out when you want to buy physical gold.
Earlier there used to be a tax advantage in buying Gold ETF as compared to physical gold as it had the lenient capital gain taxation. But in last budget, finance minister has taken away that benefit and now ETF and physical gold are at par at least from taxation point of view.
ETF is no doubt a convenient and secure way of buying gold. You can buy the desired quantity on a click of mouse and does not even require making arrangement of storage and security.
But in case of ETF also there is a cost involved which is 0.5-1% p.a. of the value of the underlying gold in the form of fund management charges. This means that if you have Rs 3 lakh of gold ETF in your demat account, you are indirectly paying Rs 1500- Rs 3000 as fund management charges every year. With the increase in quantity of gold or gold prices, fund management costs also keep on increasing in absolute terms. Now looking at the fixed locker rental with no linkage to the quantity and prices of gold that is kept in there, fund management charges of ETFs may seem too high especially when the quantity is high.
On the other side, discounting the extra cost that one pays to buy pure gold, inconvenience cost in regularly going to jeweler/bank along with travel costs, security issues in transit as well as no guarantee of safety even in bank lockers, ETFs seem to be a better product to invest in.
Those who don’t have demat account may go for gold savings fund which further invest in gold ETFs. But do keep in mind that the expense ratio of gold savings fund is higher than gold ETFs.
So the bottom line is that if the marriage is due 2-3 years or more down the line, it is better not to buy gold in lump sum , unless you have started buying specific jewellery for the function.
Manikaran is a member of The Financial Planners’ Guild , India (FPGI). FPGI is an association of Practicing Certified Financial Planners to create awareness about Financial Planning among the public, promote professional excellence and ensure high quality practice standards
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