Gold An Investment Avenue

Gold is one of the most popular precious metals for investment today. It can be passed on from one generation to the other by way of inheritance, bought for consumption purpose or as an investment avenue. Thus, we can attach following 3 values to Gold:

Emotional Value: Gold in the form of Inheritance / gift on special occasions like marriage, birthdays, etc.
Consumption Value: For self consumption or for future generations for their consumption or gifts.
Investment Value: As a hedge against inflation & during economic uncertainties as a medium of exchange.

There are 5 ways of investing in gold:

Purchase of physical gold: A conventional way of buying gold. Buying jewelry, coins through jewelers, banks etc.
Investment through Gold Mutual Funds: Investment in gold through SIPs in Gold Mutual Funds.
Investment through Gold Exchange Traded Funds (ETFs): Buying units of gold through stock exchanges.
Investment through Derivative Markets: Buying through gold Futures and Gold Futures Options.
Electronic Gold (E-Gold): This is similar to Gold ETFs and offered exclusively by National Spot Exchange Ltd. (NSEL)

Let’s now analyze the above mentioned Gold buying options one by one in detail:

Purchase of physical gold

It’s the most conventional way of buying gold. It includes buying gold from our age old family jeweler in the form of readymade jewelry, made to order jewelry or coins, rings, and so on. Nowadays banks too, sell gold coins, biscuits, bars.

However there are certain drawbacks of owning physical gold:

Storage & Safety: Physical gold requires storage like a safe or bank locker and risks associated with physical gold like theft or losing it also cannot be ruled out.
Emotional Touch: Most of the times jewelry or ornaments have an emotional value attached to it. Hence it cannot be considered as a liquid asset in times of crisis.
Costs involved: It involves some expenses like making charges, locker charges, if insured then insurance premium and so on.
Taxation: In case of physical gold, the minimum holding period is 3 years for benefit of long term capital gain. If sold before 3 years one has to pay short term capital gain taxed at the individual tax slab. In case of other forms of investment in gold the period for long term capital gains is holding period of more than 1 year.
Wealth Tax: Physical gold attracts wealth tax if the value of the gold exceeds 30 lakhs.

Investment through Gold Mutual Funds

Investing in gold mutual funds is like investing in any mutual fund actively managed by a fund manager through SIPs. In this, the funds are invested in gold mines to reap the benefits.

The features of this type are as follows:

Benefit of Rupee Cost Averaging: Since the investments are in the form of SIPs, one can enjoy the benefits of rupee cost averaging without bothering much about the swinging markets.
Ease of Operation: No demat a/c is required like in case of gold ETFs or E-gold.
Safety & Security: Since no physical gold is involved it is safer to invest in gold mutual funds.
Costs Involved: Expenses on account of fund management charges are higher as compared to the ETFs but lower compared to the expenses incurred on physical gold.
Redemption Process: On redemption, the amount of funds will be dependent on the closing NAV of the fund. Also, redeeming them before a stipulated time frame may attract exit load.
Profitability: In case gold mining companies are making profits, the investors in turn are benefitted.
Taxation: The long term capital gain, i.e. profits made on funds redeemed after a year, are taxed @ 10.3% with indexation & 20.6% without indexation benefit.
Wealth Tax: Gold Mutual Funds do not attract any wealth tax liability.

Gold Exchange Traded Funds (ETFs)

Exchange Traded Funds or ETF is like trading shares on a stock exchange but treated as mutual funds.

In case of Gold ETFs, Gold is a security under consideration. One can purchase units of gold in multiples of 1 unit. 1 Unit = 1 gram of gold. (A few fund houses also trade ½ gram gold as one unit.) As one invests in mutual funds by way of SIPs or lump sum payments, in the same fashion investments in ETFs can also be done on a periodic basis. The units of ETFs like share trading can be traded on a stock exchange by opening a Demat A/c. The NAV of the gold ETF varies according to the variations in the gold prices.

Gold ETFs are considered as debt mutual funds for tax purpose. The gains from sale of units held for a period of less than 12 months are treated as Short Term Capital Gains & taxed as per individual’s tax slab (it can be as high as 30.9% if one falls under highest tax slab). If units are sold after a year then the long term capital gain is taxed @ 10.3% with indexation & 20.6% without indexation.

Features of Gold ETFs are listed below:

Safety & Storage: Since there is no physical gold involved it is a safer avenue for investment in gold. So there is no question of storage as well.
Less Expensive: Lower Expense Ratio compared to Gold Mutual Funds. Also no making charges, locker charges are applicable in case of ETFs.
Tax Efficiency: If held for more than a year ETFs are tax efficient as compared to physical gold sales. Also ETFs don’t attract Wealth Tax, Security Transaction Tax (STT) as well.
Affordability: Gold can be bought in as small quantity as 1 gram gold.
Purity: ETFs guarantee purity of gold, usually 99.5%.
Liquidity & Transparency: Gold ETFs can easily be bought & sold on exchanges and hence there is transparency in the prices.
Advantageous for HNIs: HNIs can have advantage of buying higher quantities of gold through ETFs without any taxation and are assured about the purity & delivery for 1 kilogram and above.
On redemption: One can get the funds on redemption of Gold ETFs & not the physical gold. (Except one fund house – Motilal Oswal).

Investment through Derivative Markets

A gold future means gold bought at the price and quantity decided today, at a future date. Advantage is one doesn’t have to pay the full consideration now and the seller too need not part with the gold today. Gold future can be good form of hedge in rising gold prices as one need to pay the price today. However if the prices fall in future as compared to today’s prices then it turns out to be a business of loss. There are certain exchanges like MCX, NCDEX who deal in gold futures.

Features of Gold Futures are listed below:

Good Investment Avenue if one is bullish about the gold prices in future & vice versa.
Investors need not put in the entire amount at the time of entering into the contract, only 5% of the transaction vale.
Trading in gold futures attracts a combined service tax and education cess at 12.36%, on the standard brokerage fee. Trading in gold futures takes place with the delivery or without delivery.
When the delivery takes place, gains or profits is treated as a business income and taxed according to appropriate tax brackets. And, if the contract is settled without the delivery, proceeds are treated as an income from speculation and are taxed under short-term capital gains.
Risk averse investors or new investors should refrain from investment in futures as these are highly uncertain in returns.
It is preferred by speculators & big investors with high risk appetite.

Electronic Gold (E-Gold)

It is a new way of investing in gold, invented and implemented by National Spot Exchange Ltd. (NSEL). Like ETFs, one can invest in E-gold through demat a/c and purchase as small as 1 gm of gold. This trading facility is available on Monday to Friday (except Exchange specific holidays) from 10.30 am to 11.30pm.

Features of E-Gold are as follows:

Ease of trading: One can buy/ sell gold through the exchange easily from the comfort of home/office.
Smaller quantity: Even a smaller quantity of 1 gm of gold can be bought. 1 unit=1 gm of gold.
Lower Expense Ratio: The management expenses are lower compared to Gold ETFs. No making charges, no locker charges.
Conversion in physical gold: Opportunity to convert the units in physical gold i.e. coins/bars in seamless manner. Purity: Gold purity is 99.5%
Safety & Storage: Since there is no physical gold involved it is a safer avenue for investment in gold. So there is no question of storage as well.
Taxation: The long term capital benefit can be claimed only after three years like in case of physical gold.
Demat A/c: Like Gold ETFs, one needs to have demat a/c for trading in E-gold.

To analyze the pros & cons & suitability of each of these above mentioned ways of investment in nutshell, following table can be referred to.

Features	Physical Gold	Gold Mutual Fund	Gold ETF	Gold Futures	E-Gold
Storage & Safety	Required since physical gold is involved.	Not Requied since funds are with the AMC.	Required since gold is in demat form	Required since gold is in demat form	Required since gold is in demat form
Affordabilty	Yes, as small quantity can be bought.	SIPs can be decided by the client depending on his financial condition & other aspirations.	Yes, as small quantity can be bought.	No, as bulk quantity like 100 gms or more is involved.	Yes, as small quantity can be bought.
Purity	Purity can not be guaranteed.	NA	99.50%	99.50%	99.50%
Expenses	Expensive as making charges, locker charges, insurance premium (In case of insurance taken on gold) as these costs are involved.	Expensive compared to Gold ETFs as fund management charges are more.	Less expensive compared to physical gold & Gold Mutual Funds but more expensive than E-Gold.	Expensive compared to all the other forms of gold investment as interest cost of borrowing gold plus insurance and storage charges are involved.	Less expensive compared to other forms of investment.
Liquidity & Transparency	Easy liquidity & less transperancy since unorganised sector.	Easily liquidable. Redemtion proceeds are generally credited within 4 working days.	Easy & transparent process for liqudation since done on exchange.	Easy & transparent process for liqudation since done on exchange.	Easy & transparent process for liqudation since done on exchange.
On Redemption	Funds are recived at the prevailig market rate.	Funds are transferred to clients designated bank account.	Funds are received (Motilal Oswal Fund house provides the facility to convert the proceeds in the physical Gold).	Either funds can be transferred to designated account or facility to convert in gold is also available.	Either funds can be transferred to designated account or facility to convert in gold is also available.
Taxation	Long term capital gain benefit can be availed only after a period of 3 years	Long capital gain applicable after completion of 1 year. Long Term Capital Gain taxed at 10.3% without indexation & 20.6% with indexation benefit. Short Term Capital gain taxed as per individual tax slab	Long capital gain applicable after completion of 1 year. Long Term Capital Gain taxed at 10.3% without indexation & 20.6% with indexation benefit. Short Term Capital gain taxed as per individual tax slab	Trading in gold futures attracts a combined service tax and education cess at 12.36%, on the standard brokerage fee. Trading in gold futures takes place with the delivery or without delivery.When the delivery takes place, gains or profits is treated as a business income and taxed according to appropriate tax brackets. And, if the contract is settled without the delivery, proceeds are treated as an income from speculation and are taxed under short-term capital gains.	Long capital gain applicable after completion of 1 year. Long Term Capital Gain taxed at 10.3% without indexation & 20.6% with indexation benefit. Short Term Capital gain taxed as per individual tax slab
Wealth Tax	Applicable for gold worth more than 30 lakhs @ 1%	Not Applicable	Not Applicable	Not Applicable	Not Applicable
Requirements		No Demat A/c is Required	Demat A/c is Required	Demat A/c is Required	Demat A/c is Required
Suitable For	Conservative clients	Suitable for risk averse clients yet who want to benefit from the actively managed fund.	Risk Averse, Disciplied & Net Savvy clients	Risk Takers & Speculators	Risk Averse, Disciplined & Net Savvy