Gold as an investment
option
By Mr. Sanil Kumar,
Geojit BNP Paribas
Why to invest in gold? Should I invest in
gold? Is gold a good investment option?
It is your hard earned money. So you need to
think and answer these questions before
investing in gold.
What are all the benefits of investing in
gold?
There are 2 primary reasons why you need to
invest in gold.
Investing money in gold is worth because it is
a hedge against inflation. Over a period of time, the return on gold investment
is in line with the rate of inflation.
It is worth investing in gold for a one more
very valid reason.
That is gold is negatively correlated to
equity investments. Say for example 2007 onwards, the equity markets started
performing poorly whereas the gold has performed well. So having gold as an
investment option in your portfolio mix will help you reduce the overall
volatility of your portfolio.
Return on gold investment
Is it profitable to invest in gold?
Investment in gold proved remarkable from 2006
to 2011. During that time span, Gold has given average return of 29% per annum
which was any day better than other investment options.
However, the long term average return on gold
investment is less than 10% p.a. Still, if you want to invest in Gold and
cannot resist yourself from the temptation then these are few tips on how to
invest in gold correctly!
(1) Jewellery buying
Our age-old and traditional way of investment
is jewellery buying where one can buy gold ornaments, bars or coins. However,
it has its own disadvantages, total buying cost involves heavy making charges
(it can be 10 to 20% of total cost).
However, when you try to sell the same
piece to same jeweler, he will buy it below market rates and deduct those
making charges from the total price of your jewel.
(2) Investment in Gold coins & bars
Investment in gold coins and bars is also a
better option over jewel buying. You need to decide on 'Where to buy gold coins
or bars?". You should buy gold bars and coins only from jeweler. Banks
also sell gold coins or bars.
Then why do we advocate for buying gold bars and
coins from jewelers? To answer this question you ask yourself "How to sell
gold coins or bars?" or "Where to sell gold coins in India?"
Banks sell gold coins and bars, but they
cannot buy it back. Whereas, the jewelers can buy back the gold coins from you.
(3) Gold ETF..!
What is Gold Exchange Traded Fund? Gold
exchange traded fund is a type of mutual fund which in turn invests in gold and
the units of this mutual fund scheme is listed in the stock exchange.
How to invest in Gold ETFs in India? You need
to buy Gold ETFs from the stock broker by way of opening a demat account and
trading account. You have to pay brokerage fee for buying and selling of these
Gold ETFs.
You will have to further pay charges as fund
management charges.
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| Mr. Sanil Kumar, Geojit BNP Paribas |
(4) Gold Fund of Funds..!
What is Gold Fund? Gold fund is a Fund of Fund
which will invest in Gold ETFs on behalf of you. Best part here is that you do
not require holding any demat a/c here.
Then how to invest in Gold Mutual Funds? Just
like investing in other mutual fund schemes. As this is like any other mutual
fund scheme, SIP investment in gold is possible through these gold funds.
Still buying Gold fund of fund is little
expensive option, as you have to pay
(1) Annual management charges for the
underlying Gold ETF
(2) Annual management charges of Gold FOF
Scheme
Gold ETFs Vs Gold Mutual Funds
With Gold ETFs, you need to open demat account
and pay broking charges. With Gold Mutual Funds, you need to bear the
additional charges charged by the Gold Fund of Fund.
If you are buying in less quantity then gold
mutual funds may be suitable.
If you are buying in more quantity then you
can negotiate for the lesser brokerage charges from your stock broker, hence
gold ETF may be suitable.
(5) Equity based Gold Funds..!
Here these funds are directly not investing in
Gold but investing in the companies, which are related to the mining,
extracting and marketing of the Gold. Besides, its performance is purely
dependent upon the performance of the fund house and the equities they are
investing.
In the other 4 options, your investment
performance will be directly linked to the price movement in gold.
However, investment in these funds is suitable
for investors with high-risk appetite. As these are equity-based funds, equity
risk is there.
Therefore after assessing or weighing pros and cons of each gold
investment option, one can conclude that Gold ETFs and Gold Funds are safest, profitable
and most preferred options among the various alternatives.
How much to invest in Gold?
5% to 10% of your over assets can be invested
in gold. If you invest more in gold, remember in the long term return on gold
investment is less than 10% p.a.
Is it right time to invest in gold?
"When to invest in gold?" or
"Should I invest in gold now?" is a question always.
There is no
right or / wrong time to invest in gold.
You need to invest in gold for
long term at least for 5 years.
However, the long term average return on gold
investment is less than 10% p.a. Investments in equity market long term can
give you much more return, but equity risk is there compared to gold
investment.
About the author..
Mr. Sanil Kumar is Head – Sales at Geojit BNP
Paribas
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