Best Way To Invest In Gold This Festival Season
Investors should look beyond the traditional way of buying gold jewellery and consider investing in gold bonds, ETFs or digital gold
Come Dussehra and Dhanteras period, gold purchase peaks in India as festivals are considered to be an auspicious time to buy gold. While there is no evidence to support that, gold is a good investment option to include in one’s portfolio.
Gold price in India has surged by about 23% in the last 10 months, having crossed the INR 40,000 mark several times in September. Increase in the yellow metals’ price on the global commodity market is the key reason for the domestic rally, say experts. “Geopolitical factors like interest rate cut by US Federal Reserve, escalating trade tensions between China and US and negative long-term bond yield in the US markets are all a tailwind for gold prices. Domestic gold market follows the international gold market trends,” says Pritam Kumar Patnaik, Head—Commodities, Reliance Commodities.
The overall weak economic global outlook has also buoyed up gold prices. “There is historical evidence to show that whenever market goes through a turbulent phase, gold tends to do well. If we go back to the 2008-09 financial crisis, between March-October 2008 Indian markets corrected by 50-60 percent whereas gold was up by 20-30 per cent. Later, around the lull period of 2010-11, again when the market went down by about 20 per cent gold surged some 10 per cent,” says Nitin Shanbhag, Senior Executive Group VP, Motilal Oswal Private Wealth Management. This year’s gold rally against the choppy markets is also a testament to this trend.
Muted Demand For Ornaments This Festive Season
Several news reports show that demand for physical gold remained tepid during the Navaratri and Dussehra period this year due to steep rise in prices. Gold price was trading at INR 38,600 per 10 gram on the day of Dussehra.
Subdued demand is most likely to follow through Dhanteras and Diwali, as chances of a sharp correction in gold prices are low. “US Fed is expected to cut interest rates further as the manufacturing numbers from the US and other major economies like China remain unattractive. Further rate cuts will support the current surged gold prices,” says Tapan Patel, Senior Research Analyst, HDFC Securities.
Experts recommend that investors should look beyond gold ornaments and consider investing in alternative products, like gold bonds or ETFs, this festive season for the purpose of diversification. “Gold is an attractive investment at any time, but investors should shift from the traditional form of buying gold jewelry to invest in non-physical forms of gold,” says Patel.
How To Invest in Gold
Physical gold: Buying physical gold involves high charges and issues related to storage and purity. You pay about 35-40 percent extra on making and wastage at the time of buying jewellery, which is deducted from the final selling price when you sell it. This means, each time you buy and sell gold jewellery, you not only incur extra costs but also lose on its value. Making charges of gold coins and bars are relatively cheaper but you cannot invest smaller amounts with them.
Gold Bonds: The Reserve Bank of India (RBI) issues Sovereign gold bonds (SGBs) that are government securities denominated in gold. Amit Kukreja, Founder, Amitkukreja.com says that SGBs are the best way to invest in gold. “They payout an interest of 2.5 per cent per annum, give tax-free capital gains on maturity and do not involve any management charges,” he says. However, gold bonds score low on liquidity as they come with a lock-in period of five years and maturity period of eight years. Redemption before maturity attracts tax on capital gains.
Gold ETF: ETFs trade on stock exchanges for which you need a trading account with a broker and a demat account. They can be bought and sold at the market gold prices. “Through ETFs, the investor buys a proportionate value of gold but not in the physical form. Since ETFs are bought and sold at the market price, changes in the gold prices affect that of Gold ETFs,” says Patnaik.
With gold ETFs, the investor has to pay broker's charges and total expense ratio (TER). However, these costs are much lower compared to the costs incurred in buying physical gold.
Digital Gold: This is the newest form of investing in gold that starts with as little as INR 1. Digital gold is neither a financial product nor a deposit. It is a way of buying and selling gold at the prevailing market prices whenever you want and for as long as you want. “Digital gold gives easy liquidity and great access as it’s available round the clock,” says Shanbhag.
Since the gold that the investor owns is not physical but virtually stored in an MMTC (metals and minerals trading corporation) vault, he does not have to pay any storage fees, unlike a locker for storing physical gold. However, if the investor decides to convert his gold holdings into physical gold, he will have to pay making and delivery charges.
Restrict Gold Exposure
Despite the spurt in prices and its stability during choppy markets, investors should restrict gold exposure to 10 per cent in their portfolio, say experts. “Fundamentally, there is no reason to hold gold as there is no cash flow or earning. Gold acts only as a cushion against market volatility. So investors should maintain 5-10 per cent exposure to gold just for the purpose of diversification,” explains Shanbhag.
Moreover, from an investment perspective, gold has not given worthwhile returns in the last 5-7 years. Value Research data shows that equity has generated average compounded returns of 8.5-10 per cent, whereas gold has remained flat at about 5 per cent after the last rally in 2011. "Long term past returns of gold show that it is not an investment class that can fulfill financial goals. It is only an asset class that acts a hedge during turbulent times," says Shanbhag.