How to invest in gold for maximum returns

Karan Deo Sharma
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How to invest in gold for maximum returns

How to invest in gold, guildelines

Gold has been on a tear this year. While popular investment avenues such as equity, fixed-income and real estate have been pummelled by the economic tsunami unleashed by Coronavirus disease (COVID-19), the yellow metal seems to be enjoying the virus. The physical gold prices are up 49 per cent in the last 12-months in India beating all other assets by a long-mile. That’s equivalent to all the gains made by BSE Sensex since the beginning of 2014 calendar year.

However this doesn’t mean that all gold investors saw 50 per cent jump in the value of the investment last year. That’s the gross returns on purchase of a pure gold – 24 Carat gold bar or coin excluding the making charges. There are many ways to own gold and returns could vary quite a bit from the headline number depending on the form in which you added the yellow metal to your portfolio  Besides buying gold bars and coins, three main ways add gold to your portfolio include jewellery, gold ETF and Sovereign Gold Bonds (SGB). Let's look at the pros and cons of all these investment types.

1.       Jewellery: It is the most common and easy way to own gold in India. Well-crafted gold jewellery is a work of art and one of the best ways to win a woman’s heart. Jewellery collection is heirloom and a matter of family pride and history. However, it is a very inefficient way of gold investment. Jewellery making is labour intensive and making charges form a significant part of its retail price.

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But when you sell or redeem the jewellery, you only recover the value of gold, not the making charges.

As a thumb rule, branded jewellery has higher making charges than your neighbourhood jeweller. Most common brands currently charge around 25 percent making charges though it can go as high as 40 percent for unique designs and can be as low as 15 percent for plain jewellery. This is a cost to your investment. Let’s say you had bought gold jewellery worth Rs 1 lakh a year ago. If you sell it now, jeweller is not likely to pay you more than Rs 1.2 lakh for it. This is because the gold content in that jewellery would be worth Rs 80,000. Nearly 50 percent appreciation on gold translates to only 20 percent annual return on your investment.

So when you buy gold jewellery keep an eye on the making charges. Some of the common ways to save on making charges is to skip national brands in favour of regional or reputed local brands offering good Hallmarked designs at lower charges.

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Many jewellers bring down the making charges if you negotiate.

Monthly savings scheme run by most large jewelers is also a popular way to buy gold. Under the scheme, you deposit a fixed sum for 10 consecutive months in the jewellers’ bank’s account and you buy gold jewellery in the 11th month for the amount saved by you. Most jewellers pay a nominal interest on your savings. For example, if you make a monthly deposit of Rs 2000 at Tanishq for 10 months you can buy jewellery worth Rs 21,500 in the 13th month, which translates into 7.5 percent interest on your monthly deposits.

24 Carat Advice on Buying Gold

Better still, many chains waive-off the making charges on jewellery bought under the monthly scheme, offering a better bang for the buck than low single digit interest on your deposits.

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2.       Gold Exchange Traded Funds (ETF): ETFs are like mutual funds (MFs), but unlike equity MFs which buy and hold shares of companies’ gold ETF buy and hold physical gold on behalf of their investors.

Gold ETFs are an efficient and no-nonsense way to invest in the yellow metal.

This is especially true if you already have a demat account and own other financial assets such as shares, equity or debt MF. They are bought and sold in stock exchanges like shares, saving you the hassle of buying and storing physical gold. Gold ETF prices are benchmarked to the price of physical gold and the buying and selling price is very close to the market price of the yellow metal.

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There are however some costs associated with ETFs that could lower returns by a few percentage points. First is the expense ratio or the fund management fee that is usually around 1% of the investment value. Then you will have to incur broking charges while buying and selling units. Returns could also be impacted by tracking errors where ETF fails to mirror physical gold prices due to the fund's expenses and cash holdings. However, the overall costs don’t usually exceed 3 percent of the investment value.

3.       Sovereign Gold Bonds (SGBs): They are the newest way to own gold. In essence SGBs are government bonds denominated in grams of gold with a maturity period of eight years, though an investor can sell the bonds on exchanges after five years.

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They are substitutes for holding physical gold.

Investors have to pay the issue price in cash and the bonds will be redeemed in cash on maturity. The beauty of SGB is that they pay interest at the rate of 2.5% per annum on the initial investment. This juices up the overall return on gold portfolio besides providing investors with a small cash flow on semi-annual basis like equity dividend.

In conclusion, gold is always a good investment bet. It’s a hedge against inflation and economic uncertainty. And it is best to have a mix of jewellery, gold ETFs and SGBs in your portfolio.

(Karan Deo Sharma is a Mumbai-based finance and equity markets specialist).

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