Throughout centuries, people have continued to hold gold for various reasons. The key lies in knowing how to buy gold which can diversify your investment portfolio.There are many different ways to own gold and it can be quite perplexing at times. This article will help you understand the pros and cons of various kinds of gold investment like jewellery, gold bullion bars, gold bullion coins and Gold Exchange Traded Funds (ETFs).
Jewellery: Let us start with jewellery, it being the chief and the most traditional form of buying gold in India. Many well known jewellers stamp their different pieces of gold jewellery with the specific karat quality called the Hallmark. The Hallmark is usually found on the inside part of each piece and will indicate the gold content, for example, 18K for 18 karats of gold. In addition, always insist on a certificate of authenticity which ensures that you are purchasing a quality piece of gold jewellery.
The main advantage of buying gold jewellery is that you can wear it and enjoy your wealth.
It acquires great monetary value and at the same time attains the status of heritage as it passes down generations.
If you are specially buying jewellery for investment purposes, then you can select a piece that contains a higher percentage of pure gold. The higher the karat, the more is the content of gold. So, it is ideal to choose 24 karat or pure gold or 22 karat that is, around 91% gold, if you want to profit from investment in gold jewellery.
Though yellow gold is popular, you can get exquisite designs even in white and rose gold. Designer gold jewellery can be a great option in this regard.
Gold Bullion Bars: Gold bullion bars are most often bought in the form of gold bullion and can be purchased from any certified gold dealer. Some of the advantages of buying gold bullion bars are:
Bars are the easiest form to measure your gold.
They come in many different shapes and sizes to meet the needs of different investors.
This form of gold investment is very good for corporates and people contemplating to make large investments in gold.
Most gold bars consist of pure gold meaning they are 24K in quality.
If you are investing a large sum of money into gold bullion bars, it is better to buy one large bar than several small ones. Manufacturers add production costs to the market price of the bars which they sell. So if you buy fewer bars you save on these costs.
Gold Bullion Coins: As compared to jewellery and gold bullion bars, gold bullion coins are more convenient to own in terms of portability, ease of storage and size. Particularly, for the small investor, investing in gold bullion coins is the ideal choice. There are a variety of sizes that can be purchased from any reputed gold dealer. Make sure that you check the products certification indicating the quality. Also ensure that it comes in a tamper-proof pack to prevent any kind of damages to the product.
Disadvantages of buying jewellery, bars or coins
Physical jewellery and gold bullion bars attract wealth tax.
Although gold does not tarnish, it is a relatively soft metal. It may show signs of wear after time especially if you are buying items like bangles and rings which accidentally get knocked against hard surfaces.
There is lot of wastage if the designs are intricate, so indirectly you are paying a price for that too in the form of making charges. Making charges vary according to the design but on an average the more elaborate the piece, the higher are the making charges. As an investor you may never be able to recover that cost if you decide to sell that jewellery.
The purity of gold used in making jewellery is still a matter of concern. Though this problem has subsided due to hallmarking, it has not been completely solved.
Most jewellers make some deductions from the value of gold if you try to sell them jewellery that has been bought from some other jeweller.
In India, in most families, gold jewellery is bought with a lot of emotions attached to it and is the last thing to leave our house in terms of financial difficulties or even to gain from a favourable price rise. This negates the entire purpose of gold bought for investment purposes.
The storage of physical gold is a matter of great concern. Storing gold in large quantities is relatively risky and expensive compared to other forms of investments. There is always the constant fear of loss and theft.
Investment in gold does not provide any current and regular income like dividends or rentals as is the case with shares and real estate where investors can reap the benefits of their investment without selling their assets.
Investing in gold does not provide any tax benefit compared to other tax saving instruments available in the market.
Liquidating gold bullion bars may be tough because of their sheer value. Bullion bars may not be convenient for small transactions as the minimum investment is higher than a common investor can think of.
Gold ETF: A smart option available now is to buy Gold Exchange Traded Funds (ETFs). It is like buying gold in an electronic form. This Fund is traded like stocks or shares on stock exchanges. You buy them just like you buy other stocks from your broker. Each gold ETF unit is approximately equal to the price of one gram of gold. In due course, you can build up your gold portfolio in the same manner you would buy physical gold. You can invest in small chunks and build up a sizeable amount. Investing in Gold ETFs has many plus points. Here is why…
Your gold is in Demat form. So you do not have apprehensions about its safety. There are no constant fears about its theft.
Gold in electronic form is easier to store and you save a considerable amount on the locker rents.
You do not have to pay any premium or making charges as you otherwise have to shell out when you purchase gold jewellery.
In case, you later wish to buy jewellery, you can always convert your e-gold into physical gold at an appropriate time. Gold ETFs are easy to sell. They can be sold at any time through your broker and fetch the same price across the country. This is a great advantage over physical gold since most jewellers offer only an exchange and not a buyback.
This form of investment enables you to buy gold in small lots too. You can buy even a single gram of gold. Thus you can plan your procurement as per your future needs. For example: education or marriage of your children.
It is easy to keep a track on your gold investments in an electronic form through your Demat statements.
As in the case of physical gold, you do not have to worry about impurities in an ETF.
Gold ETFs are a very tax-efficient way to hold your gold. VAT or Securities Transaction Tax is not applicable on gold ETFs. As they are traded like stocks, they are eligible for long-term capital gains after one year, unlike physical gold, which is eligible for long-term capital gains after three years. Besides, unlike physical gold, you do not have to pay Wealth Tax on gold ETFs.
Disadvantages of investment in gold ETFs
The main disadvantage of the gold ETF is the fact that physical gold is not in your hands. At no point of time you actually own a gold coin or a bullion bar. Unless the ETF assures that gold is in the allocated accounts, you cannot ignore the market risks attached to the ETFs.
You need to be registered as a Client with a broker to trade on the stock exchange.
Buying e-gold units also involves payment of some costs like brokerage or commission charges and Demat account holding charges. A small asset management fee may also be charged by your fund house.
Some ETFs may not be actively traded and may show low trading volumes. In such a case, the advantage of actually purchasing an ETF may diminish. You need to carefully choose a more liquid ETF where the volumes are higher.
As a prudent investor, you need to check out the performance of the ETF before you invest in it.
If you are a long-term investor, then the intraday trading opportunities created by ETFs may not fit into your investment strategy. So, it is very important to chalk out your investment goals before you decide to include this form of investment in your portfolio.
If your heart is already set on that exquisite piece of jewellery in your friendly neighbourhood jewellery shop, then you may find it extremely difficult to buy an ETF.
To conclude, Gold ETFs are very popular today, but it is also true that nothing can beat the gleam in your eyes when you hold that yellow piece of metal in your hand. If you are someone who feels that gold is nothing but an investment, then an ETF may be a better choice for you, whereas if you stick to the traditional values of gold as an auspicious gift for any occasion, then you may want to physically buy gold and store it. So, whatever mode of investment you opt for, just go for it, because as an old adage goes “Nothing can be as good as gold.”