Looking out to invest in Gold? Go for paper gold!

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.

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