Posted On Wednesday, Oct 26, 2016
Dhanteras and Diwali – the most eagerly awaited festivals – are around the corner, giving us the opportunity to indulge in various pleasures such as sweets, shopping, socializing, gifting, and most of all – buying gold. The tradition of buying gold during Diwali has continued over thousands of years – and for all the right reasons. The yellow metal has delivered healthy returns over the long term. Moreover, it has provided essential financial security during trying times. This along with a timeless charm has made gold popular amongst the masses. An endorsement by tradition is just what is needed for buyers to rush into purchasing gold. In their eagerness, buyers frequently splurge on gold jewellery by convincing themselves that they are investing rather than spending, since the value of the ornaments is likely to increase in the future. While the justification isn’t entirely incorrect, it lacks some important considerations.
Gold jewellery - a dull investment option
Buying gold jewellery shouldn’t be confused with investing in gold. While gold jewellery is bought and used for its aesthetic value, it’s ineffective as an investment option. This is because of the loss in value on resale. The making charges on gold jewellery, which typically range between 6-14 per cent of the cost of gold (and may go as high as 25 percent in case of special designs) are irrecoverable. In this context, one may feel that gold coins and bars are better suited for investment. However, it should be noted that purchase of gold coins and bars comes at a significant premium of about 5-15 per cent over the price of gold (the lower the denomination of the coins and bars, the higher is the premium). This premium is irrecoverable on sale.
Smarter ways of investing in gold
Increasing awareness on the drawbacks of physical gold as an investment option has made people switch to Gold Exchange Traded Funds (ETFs) and Sovereign Gold Bonds – the smarter ways of investing in gold. Gold ETFs are mutual funds that invest in physical gold. Each unit of a Gold ETF represents 1 unit (or in some cases 0.5 units) of gold. Investors in Gold ETFs do not bear making charges associated with physical gold. Moreover, Gold ETFs are traded on the exchange at the prevailing market price of physical gold, which implies that investors can buy or sell their holdings at prices that are close to the market price, without worrying about paying a significant premium on purchase or selling at a discount. Sovereign Gold Bonds are government-backed securities denominated in grams of gold. Investors in Sovereign Gold Bonds are assured of the market price of gold at the time of purchase and redemption.
Gold ETFs vs. Sovereign Gold Bonds
At the outset, Gold ETFs and Sovereign Gold Bonds may seem similar. However, there are a few differences which are highlighted below:
|Sovereign Gold Bonds
|Backed by pure physical gold.
|Backed by government guarantee on the market price of gold.
|Profit on sale is taxable. Rate of tax depends on the holding period.
|Profit is not taxable only in case the bonds are held till maturity. Otherwise, it is taxed based on the holding period.
|Additional income and expenses
|Investors earn returns in line with gold (barring expenses such as fund management fees, storage charges and insurance costs.). No interest is paid.
|Investors earn returns in line with gold. They also earn additional income in the form of interest (2.75 percent at present; taxable according to the tax rate applicable to the investor). There are no additional expenses.
Mathematically, Sovereign Gold Bonds may seem more rewarding than Gold ETFs; however, investors need to consider other factors such as:
|Sovereign Gold Bonds
|Very liquid given the high trading volumes on the stock exchange. Gold ETFs have been in existence for more than eight years and have proven and established liquidity.
|Liquidity may be constrained by low trading volumes, which means investors may have to compromise on the value due to demand-supply mismatch in the secondary market.
|Investors can expect resale value to mirror the market price of physical gold.
|Resale value can be impacted in the absence of adequate demand as the bonds are non-fungible for physical gold or cash before a period of five years.
|Easy availability owing to high trading volumes.
|Availability depends on issuances by the government. Although the bonds are traded in the secondary market, availability may still be an issue in case of low trading volumes.
|Systematic purchase option
|Investors can make systematic purchase, which means they can invest a fixed amount of money at regular intervals with an aim to reduce the average cost of their investment over the long term. Systematic purchases can be made by buying on the exchange or through Gold Funds that invests in the Gold ETF. Through Gold Funds, you can sign up for buying gold at regular intervals for the desired time period in a single transaction.
|The option to make systematic purchases is not easily available at present. It will depend on government issuances or liquidity on the stock exchanges.
Gold is a safe haven asset, which makes it an effective portfolio diversifier. It’s thus prudent to allocate 10-15 percent of your portfolio investments to gold. Please consult your financial advisor before taking any asset allocation related decisions. It’s rational to seek higher returns within the same asset class. However, the potential to earn higher returns should be evaluated in the context of other important considerations. Liquidity is a key factor that should be considered while making any investment. Investors should be able to encash their holdings at any time without compromising on the value. Easy availability is another important consideration. The investment instrument should be easily available so that investors are able to deploy their funds without any delay. In these aspects, Gold ETFs are better option than Sovereign Gold Bonds.
|Name of the Scheme & Primary Benchmark
|This product is suitable for investors who are seeking*
|Risk-o-meter of Scheme
|Quantum Gold Fund ETF
(An Open Ended Scheme Replicating / Tracking Gold)
|• Long term returns
• Investments in physical gold
Investors understand that their principal will be at Moderately High Risk<
|Quantum Gold Savings Fund
An Open Ended Fund of Fund Scheme Investing in Quantum Gold Fund
|• Long term returns
•Investments in units of Quantum Gold Fund - Exchange Traded Fund whose underlying investments are in physical gold.
Investors understand that their principal will be at Moderately High Risk
Disclaimer, Statutory Details & Risk Factors:
The views expressed here in this article / video are for general information and reading purpose only and do not constitute any guidelines and recommendations on any course of action to be followed by the reader. Quantum AMC / Quantum Mutual Fund is not guaranteeing / offering / communicating any indicative yield on investments made in the scheme(s). The views are not meant to serve as a professional guide / investment advice / intended to be an offer or solicitation for the purchase or sale of any financial product or instrument or mutual fund units for the reader. The article has been prepared on the basis of publicly available information, internally developed data and other sources believed to be reliable. Whilst no action has been solicited based upon the information provided herein, due care has been taken to ensure that the facts are accurate and views given are fair and reasonable as on date. Readers of this article should rely on information/data arising out of their own investigations and advised to seek independent professional advice and arrive at an informed decision before making any investments. Please visit – www.quantumamc.com/disclaimer to read scheme specific risk factors.
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