Golden tips for those investing in yellow metal

Sanil Kumar

Why to invest in gold? Should I invest in gold? Is buying gold a good investment?  These are a few questions you need to think and answer before investing your money in yellow metal.

There are two 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 valid reason. That is gold is negatively correlated to equity investments. 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 profitable from 2006 to 2011. During that time span, gold has given an 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% per annum. Still, if you want to invest in yellow metal and cannot resist yourself from the temptation, here are some tips for you on how to invest in gold correctly.

Jewellery 

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 the cost). However, when you try to sell the same piece to same jeweller, he will buy it at a price that is lower than the current market rate and deduct those making charges from the total price of your jewel.

Coins and bars

Investment in gold coins and bars is also a better option over jewellery buying. You need to decide on 'Where to buy gold coins or bars?". You should buy gold bars and coins only from a jeweller. Banks also sell gold coins or bars. Then why do we advocate for buying gold bars and coins from jewellers? 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 back them. Whereas, the jewellers can buy back the gold coins from you.

Gold ETF

A gold exchange-traded fund (ETF) is a type of mutual fund which in turn invests in gold and the units of this mutual fund scheme listed on the stock exchange. To invest in gold ETFs in India, you need to buy gold ETFs from a stock broker by way of opening a demat 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 fee.

Gold fund of funds

A gold fund is a fund of funds (FoF) which will invest in gold ETFs on behalf of you. The best part here is that you do not require holding any demat account. One can invest in these gold mutual funds just like the way s/he invests in other mutual fund schemes. As it is like any other mutual fund scheme, a SIP investment in gold is possible through these gold funds.

Buying a gold fund is a little expensive option, as you have to pay

• Annual management charges for the underlying gold ETF
• Annual management charges of the gold FOF scheme

Gold ETFs Vs gold MFs

• With gold ETFs, you need to open a demat account and pay broking charges. With gold mutual funds, you need to bear the additional fee charged by the gold fund of funds.
• If you are buying in less quantity then gold mutual funds may be suitable. If you are buying in more quantity, you can negotiate for less brokerage charges from your broker hence, gold ETF may be suitable.

Equity-based gold funds

These funds are directly not investing in gold, but investing in the companies, which are related to the mining, extracting and marketing of the yellow metal. Besides, their performance is purely dependent on the functioning of the fund house and the equities they are investing in.

In the other four options, your investment performance will be directly linked to the price movement in gold. However, investment in these funds is suitable for investors with a 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?

Around 5% to 10% of your over assets can be invested in gold. If you invest more in gold, remember that the long-term return on gold investment is less than 10% per annum.

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 at least five years. However, the long-term average return on gold investment is less than 10% per annum. Long-term investments in equity market can give you much more return, but equity risk is there compared to gold investment.

The author is Head – Sales, Geojit BNP Paribas. The views expressed in this article are his own.