Recently, Gold import duties in India were hiked from 10% to 15%. The pace of the rise of import duties in India makes one wonder that the fate of the ruling government in the next year elections is riding on the fall of Gold imports. Having said that, Gold imports is likely to cross 1000 tones mark this year, even as the demand has slowed down. The coming festive and marriage season in India is expected to bring back some lost ground in terms of demand.
The various options available with the investors should therefore be looked in detail, in order to ease the trouble of choosing the mode of gold fund investment in India
Holding Gold in Physical Form:
This is the easiest and the most convenient way available for investors till date. Although this is the significant way of investing in India, new avenues like ETF (Exchange Traded Fund) are also increasing the market share. Holding gold bars and physical coins are not an ideal form of investing in India. Most of the bullion held by Indians is in the form of jewelry. It is worth noting that even if you are investing in physical form; try to invest in bars and coins that fetch more premiums. This is due to the high quality compared to jewelry.
The suspension of sale of Gold coins and bars by big jewelers and bullion traders is making life difficult for investors. The move of suspension has taken place on account of efforts from bullion traders to help government check the Current Account Deficit (CAD). This measure is being followed after the instructions from All India Gems and Jewelry Trade Federation to check the current account deficit. The move is expected to continue for another 4 months.
Exchange Traded Funds:
This has become a growing platform at least in urban middle class. Investment in Exchange Traded Funds is easy, provided you have got a dematerialized account. The underlying asset of investment is Gold. Although there is holding cost involved in this format, it is very minimal. Even the denominations of Gold ETFs make it pretty affordable. Gold ETF can be purchased in multiples of 1 gram. This is considered to be the safest form of investing.
The problems of theft and mixing of other cheap metals in Gold is not present in this form. Even the return on Gold is on the price pattern of physical gold. However, the only demerit of investment is the applicability of long term capital gains as per Income Tax Act, 1961.
This investment option looked quite good before the NSEL debacle. After the crisis, it has been noted that the investors’ confidence has totally shifted from E-gold contracts. This is because of the ban on E-series imposed on the Gold contracts. Earlier, the advantage of this form was lower denominations similar to the Gold ETFs. Transparency in pricing used to be the advantage of parking the funds in this mode. However, investors cannot invest in this mode now as the transactions have been banned till further notification by the government.
Gold Investment Through Mutual Fund:
The benefit of Mutual Fund investment in Gold is the systematic approach. By a small amount of even Rs 100, one can start investing on a monthly basis. The idea behind this type of funds is that savings can be made on a regular basis. As the SIPs have to follow a lock in period, one is not able to withdraw the funds. The major disadvantage is that, LTCG is charged on investments in Gold Mutual Funds at 20% or 10%, based on with or without indexation, respectively. Another problem is that returns are a bit lower than ETF as it is dependent on the fund manager and the fund’ performance. There are various gold funds available in the market such as AXIS Gold Fund, HDFC Gold Fund, SBI Gold Fund, Reliance Gold Fund, IDBI Gold Fund, etc.
Physical form remains the most important option for investment especially in villages. Lack of knowledge about products like ETFs and Mutual Funds in villages; make such investments limited to educated class. Meanwhile, suspension on sale of gold bars and coins and good monsoon this season is expected to take jewelry demand to a new level. E-gold ban by the government is on the contrary set to benefit the ETF industry. If you are willing to invest in gold without opening a demat account or want a systematic investment plan, then gold fund can be a good option. If you already have a demat account, then undoubtedly ETF is the best option with lower charges, more safety and great flexibility.