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Thinking of buying gold – Consider gold ETF and gold bonds

This Diwali, think unconventional when you go shopping gold for yourself.

November 10, 2015 / 12:31 PM IST
Moneycontrol Burau

Dhanteras, technically known as Dhanatrayodashi, is the auspicious day on which many individuals prefer to buy gold. Bullion gold, ornaments have been the first preference for most buyers. This year though jewelers have been expecting lower sales compared to previous year, due to weak gold prices in last one year, gold is not totally written off by investors.

Many experts are of the opinion that the gold may not do well in short to medium term. “Gold will not be the preferred asset class for investors for next 4-5 years,” says Nitin Jain, CEO – global assets and wealth management, Edelweiss Financial Services. However, he advises investors to keep around 5% to 10% of money in gold from the portfolio insurance point of view.

For the gold buyers, there are more options than ever before. You can buy gold jewellery, bullion gold or gold ETF. To add to the list, you can also buy Ashok Chakra Coins, Gold bonds recently announced by Government of India. Too many choices should not confuse you.

Ornaments offer the distinct benefit of consumption that other options cannot offer. No wonder, they enjoy maximum demand among retail investors. However, if one decides to sell his gold ornaments, he is paid to the extent of gold in the ornament. He has to face losses for impurities, making charges and wear and tear. That makes gold ornaments buying a loser’s game. Bullion gold can be a solution in some cases, wherein the individuals need not pay the making charges. Some jewelers do offer buy-back arrangements too. Recently launched Ashok Chakra coins that are available at select MMTC outlet can be a good option for gold buyers looking for touch-and-feel of gold. But a word of caution, most retail investors have to sell their bullion gold holdings at a discount to the market rate. Also there are costs associated with safe-keeping of the physical gold.

Gold ETFs and new gold bonds announced by the Government of India can come to your rescue. Gold exchange traded funds are around for some time now and as per release by Association of Mutual Funds in India Rs 6226 crore is invested in gold ETF in India, as on October 31, 2015. Generally a unit of gold ETF tracks the price of one gram gold, with an exception of quantum gold ETF that tracks the price of half gram of gold. Mutual funds generally charge around 1 per cent per year towards the fee for managing the gold ETF schemes.

Gold bonds have been a recent entrant. This is a new instrument with a time frame of 8 years. However, investors can opt for premature redemption after 5th year. These bonds are eligible for an interest rate of 2.75 per cent payable semi-annually on the initial value of deposit. RBI has fixed the value at Rs 2684 per gram for these bonds. One can invest in minimum 2 grams and the maximum investment is capped at 500 grams per person per financial year.

Being a sovereign backed bond that pays interest and further offers exposure to gold, gold bond is placed above gold ETF. Gold ETF offers less return than that offered by underlying gold, all thanks to the fund management charge of around 1 per cent and the tracking error arising out of cash in the scheme portfolio. Gold bonds are going to offer positive return of 2.75 per cent over and above the returns offered by gold.

However, there is a catch here. To maintain liquidity the gold bonds are listed on the exchange. And one is not sure of how liquid these bonds will be on the exchange. Also these gold bonds are issued in tranche. There may not be the option of on-going subscription. Gold ETF, however, can be bought each month or at some other interval, depending on the need of the investor. Also gold price for the gold bond is fixed at Rs 2684. However, the gold prices are now ruling marginally below Rs 2600. This means that you are paying almost 3.5 per cent more. If the gold price remains here till the current gold bond tranche closes, you are effectively losing out on the interest front of gold bond.

If you are a fan of systematic investment plan, it pays to be with the known option - Gold ETF. However, if you are keen on an extra interest income and willing to hold on to your investments, consider gold bond. This Dhanateras, it pays to look beyond the conventional option of gold.

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