Dhanteras investment: Go for Gold ETFs and SGBs

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New Delhi | Published: November 5, 2018 1:57:36 AM

Investment in gold is a useful diversification tool and a good hedge against inflation. For many investors, the metal is an essential store of value for financial emergencies.

Investment in gold: This Dhanteras, look at Gold ETFs and SGBs

Retail investors would be buying gold today because of Dhanteras, which is believed to be auspicious and brings in prosperity. As the rupee has depreciated 15% this calendar year, the domestic price of the precious metal has risen about 8%. Currently, gold prices in the country are around Rs 32,000 per 10 grams, the highest since September 2013.

In contrast, the market barometer 50-share Nifty has gained just 0.21% since January this year. In fact, since the beginning of September, it has dropped 9.7% as investor sentiments were impacted by weakening macros, tight liquidity conditions, IL&FS default, and already stretched valuations. Typically, volatile stock markets help to push gold demand. But with the spike in the price of the metal in the domestic market, the demand may not rise much this festive and wedding season. The World Gold Council has said that gold demand in the country this year is expected to fall from the previous year because of the rally in local prices.

Gold as a diversifier

Investment in gold is a useful diversification tool and a good hedge against inflation. For many investors, the metal is an essential store of value for financial emergencies. Also, investment in gold is highly liquid and one can sell it to meet planned or unplanned needs.

So, does it make sense to buy gold this Dhanteras? Chirag Mehta, senior fund manager, Alternative Investments, Quantum Mutual Fund says gold has proved to be a good diversification tool and a store of value for Indian investors. “Even during the recent correction in Indian equities, gold prices in rupee terms have moved up, reiterating its diversification benefits in a portfolio context,” he says. Historical analysis, according to Mehta, proves that gold does add value by reducing risk to Indian equity portfolios. “We therefore recommend a 10% allocation of one’s portfolio. Gold prices have been in consolidation mode over last few years. Given the global macroeconomic backdrop, it does add merit to add gold to your portfolio,” he says.

There are various ways one can invest in gold such as jewellery, gold coin, gold biscuits and non-physical forms such as Sovereign Gold Bond (SGB) and gold ETFs.

Physical gold

Data from World Gold Council show that for the three months to September this year, total gold demand was 183.16 tonnes—demand for jewellery was 149 tonnes and bar and coins 34.37 tonnes. On a year-on-year basis, gold demand during the September quarter registered a 10% rise to 183.2 tonne from a year earlier, as prices fell during the period.

The lure for physical gold, especially jewellery, is slowly diminishing because of safety issues, cost of holding and loss of making charges at the time of selling. Non-physical gold products is gradually gaining traction, especially in metros.

Mehta says that buying physical gold comes with high markups. “Sovereign gold bonds have emerged as an alternative but lacks liquidity. Gold ETFs are backed by physical gold and this fungibility makes it extremely liquid. Gold ETFs are price efficient, available in small denominations, convenient to own,” he says.

Gold bonds

In October, the government launched the Sovereign Gold Bond (SGB) Scheme 2018-19. The bonds will be issued every month till February in five tranches. The minimum subscription denomination will be one gram and the maximum will be 4 kg for an individual. The bonds are available in demat and paper forms and can be used as collateral for loans. Investors get 2.5% as interest per annum, which is payable semi-annually on the nominal value. The price of the bond is fixed on the basis of simple average of closing price of gold for the last three working days of the week preceding the subscription period.

Gold ETFs

Gold ETFs offered by mutual funds are a cost-effective option to buy the metal in the electronic form. In order to invest in gold ETFs, one must have a demat and trading account with a broker. One can also invest in gold funds through systematic investment plans (SIPs). An investor does not have to open a demat account to invest in gold SIPs. By investing through SIPs, an investor gains from rupee-cost averaging — when gold prices go down, the fixed SIP amount will buy more units and vice-versa. Also, since payments are made at different points of time and at different net asset values, the purchase price of units averages out over the investment period.

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