Investing in Gold – Which Way to Go ?

Posted on September 13, 2011

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“Chuck all investment avenues !! The best investment is Gold !!” Said Vinay Deshpande, a 35 year old telecom executive to his colleague, Kapil Sharma. “I am going to redeem all my money and buy some Gold Jewellery.”

“I wont be surprised if this love for jewellery came from your wife. But am surprised to hear this from you.” Smiled Kapil.

“I am not buying gold jewellery to flaunt. I am buying it as an investment.” Explained Vinay.

“Well, in that case, please be mindful of a few things. If you are buying Gold as an investment, never buy it in form of jewellery. The reason being, if you buy a jewellery (say necklace) for Rs. 1 Lakh, the actual gold content in it might not be more than of Rs. 70,000. So even if gold gives you returns as high as 30% in 12-15 months, you will only be reaching your investment amount. Also, whenever you want to redeem your gold, there will be some “gold loss” which also gets deducted from your redemption amount.” Said Kapil.

“Ohh !! Good you told me this” said Vinay. “I think, I will ask the jeweller to give me gold coins instead.”

“Gold Coins would be definitely a better option than Gold jewellery. However, buying it from a local jeweller might again come with the concerns of purity. I remember a friend of mine, bought a gold coin from the jeweller. The jeweller charged him a price of 24 Karat Gold, however, the coin was 18 Karats only.” Said Kapil.

“How much importance do these karats have actually ?” asked Vinay.

“Well, that is the measure of purity of Gold. More the purity, higher the value and vice versa. And the price which you track of Gold, is of 24 Karat Gold. So if you are buying a 18 Karat Gold, you should be paying (and later getting) a lower value. Additionally, one has to pay VAT (Value Added Tax) when buying gold coins, which would also impact your returns.” Explained Kapil.

“Ohh !! buying gold in physical form has too many problems. Coz am also worried about the storage of physical gold. If I keep it at home, it might get stolen. If I keep it in the bank, I have to incur locker charges etc. I guess E-Gold will be a better option.” Said Vinay.

“In that case, I have another threat waiting for you. Having physical gold or E-Gold will both attract Wealth Tax too when the market value crosses Rs. 30 Lakhs (combined with other non-earning assets). So pretty much likely that sooner or later you would be required to pay Wealth Tax on your physical gold or E-Gold.” Said Kapil.

“Ohh no !! So many hassles for investing in Gold !! Should I stop thinking about investing in Gold?” asked Vinay.

“Well, not really !! Thankfully we have so many options available to invest in Gold. Only thing is, every option comes with its own merits and demerits. For example, you may go for Gold ETFs and Gold Saving Funds.” Said Kapil.

“What are these ? And what is the difference between the two?” asked Vinay.

“By investing in Gold ETFs, you are buying gold in demat form and through the exchange, wherein you need to pay a brokerage for buying and selling. And if you don’t want to do that, you also have an option of investing in Gold Savings Fund, who would buy and sell Gold ETFs on your behalf.” Said Kapil.

“How is it different from investing in actual gold?” asked Vinay.

“Not very different actually. The price of Gold ETF and Gold savings fund will move similar to gold prices, as the underlying asset is gold. However, you are free from the hassles of checking the purity, worrying about theft and wealth tax. So this could be one of the better options of investing in Gold.” Said Kapil.

“So basically, if I want to enjoy the benefits of Gold investments, but keep myself away from the troubles of the same, Gold ETFs and Gold Savings Funds are the way to go for me. Thanks Kapil for your valuable advice.”

We look forward to your feedback and comments on the above article. Please feel free to contact us on saurabh@nidhiinvestments.com if you have any questions.

(The views mentioned in the article are personal opinion of the author. The characters used in the article are hypothetical)

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