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Friday, April 29, 2016

5 types of Gold Investment options.. Which one is best for you?


By on Friday, April 29, 2016

 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.
 
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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