Buying gold this Gudi Padwa? Is it still a good investment?

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Updated: Apr 08, 2016 3:10 PM

Commodity experts said that gold has emerged as a preferred investment option in the present uncertain global environment.

gold buying - Gudi PadwaCommodity experts said that gold has emerged as a preferred investment option in the present uncertain global environment. (Photo: Reuters)

Gudi Padwa festival and gold buying go hand in hand in few cities of India. The question that would be on everyone’s mind is whether this is the right time to invest and, if so, what would be the best form of investment in the yellow metal?

Commodity experts said that gold has emerged as a preferred investment option in the present uncertain global environment.

“Gold has been the best performing asset class in 2016. It can go to Rs 31,000 per 10 gms by the end of current fiscal (now hovering around Rs 29,000). I would suggest 8-10 per cent of one’s portfolio to be invested in precious metals – gold and silver,” Kunal Shah,” head of commodity research at Nirmal Bang Commodities told FeMoney. Gold has returned 16 per cent since the beginning of 2016 up to April 7.

Shah said that the yellow metal is gaining from the uncertainties in the global economy. “There is too much of uncertainties in global markets over central banks’ policies. No one know whether there will be chaos or growth. In such a situation gold will be safe haven and will give good returns,” he said.

But where do you buy gold from? And in form? The option before you is to go for physical gold, Gold ETFs or the recent Gold Bond Scheme launched from time to time. We give you the options and the advantages and disadvantages of each of those:

Retail Physical Purchase: Gold can be in purchased as gold coins or bars and finished gold jewellery. The transaction can be done from your local jewellers. If it is in jewellery form the making charges will be factored into the purchase price. High-value purchase would require you to provide your PAN card and identity proof.

Purchase through banks: Gold can be bought through various banks, which offer customers online purchase option. Banks offer gold of high purity and in quantities that are affordable starting from 0.5 grams. Gold purchased through this route come with certificate of guarantee.

Gold ETFs: Gold Exchange-traded Fund operate as normal mutual funds where the money pooled in is used to purchase physical gold. The investor is offered units in exchange of the amount of purchase as per the prevailing price of the yellow metal.

Gold Bond Scheme: The government’s Gold Bond Scheme is aimed at providing a paper substitute for investors instead of buying physical gold. The third tranche of the issue was launched in March 2016.

The bonds are issued by RBI, in both demat and paper form on behalf of the Government of India on payment of the required amount in rupees and are denominated in grams of gold.

There are benefits and disadvantages associated with both physical purchase and taking the ETF route.

Physical gold advantages: Holding physical gold provides liquidity. One can approach a local jeweller and sell. Banks, however, do not purchase gold sold to you. You will also have the possibility of getting long-term appreciation if you hold the metal through its price cycles. And lastly, and obviously, physical gold can be used for personal use as ornaments.

Physical gold disadvantages: Gold in its physical form is always open to the risk of theft. If you choose to place the yellow metal in a locker, you will have to pay locker charges.

ETF advantages: ETFs offer an affordable option since purchase is allowed in small quantities starting from one gram. One can increase the holding through systematic investment of small amounts. Another major advantage of holding ETF is that there is no chance of loss due to theft. Also, the buyer does not need to worry about purity since it is left to the fund-house.

There is also price transparency since the units are traded on exchanges.

ETF Disadvantages: Since you will have to open a demat account, if you are doing it solely for this purpose and not for general stock trading, it can turn out to be an expensive option. Moreover there would be brokerage commission to be paid starting from 0.25 per cent.

Advantages of Gold Bond: The investment can be made in as small a quantity as 2 grams. The returns are fixed and the bonds will carry sovereign guarantee. The investors will get interest of 2.75 per cent. On maturity will get the prevailing value of gold at that time. The government has also given exemption from capital gains tax on the bonds. Long-term capital gains arising to any person on transfer of SGB is also eligible for indexation benefits.

Disadvantages of Gold Bonds: The maximum investment permitted by an entity will not be more than 500 grams per person per fiscal year.

Liquidity can be an issue since the bonds are for a period of 8 years with exit option from 5th year onwards, to be exercised on the interest payment dates.

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