Hyderabad: For many gold has an emotional attachment. It has become a status symbol. While gold is primarily used for jewellery and ornaments, it also is a good hedge tool to beat inflation, making it an essential component in the investment portfolio.
Here is how you can buy gold in its physical form and also in electronic format too:
If you buy gold in physical form, it is seen as consumption and not as an investment and is fraught with risks like theft. To keep the gold safe, one needs to rent a locker, for which the banks charge annual rent. If the gold ingot is to be made into an ornament, there are expenses for making the ornaments and there are value addition charges too. The flip side of getting ornaments made is that the purity levels of gold are reduced. Buying gold bars and coins are the other preferred modes. Gold sales also attract GST.
And here is the other type of buying gold in the form of Gold Exchange Traded Funds (ETFs) and Gold Mutual Funds (GMF):
As the name suggests, they are listed and traded on the stock exchange electronically. The value of Gold ETF units increase or decrease proportionally with the price of physical gold.
One can invest as low as one unit which is equivalent to one gram or in multiples thereof. But the hitch is that one need to have a demat account to hold these units. Gold ETFs are a low-risk investment which suit conservative investors. Brokerage fee and fund management charges are applicable when buying or selling Gold ETFs. When Gold ETF, whose price is the same pan-India, is redeemed, no physical gold is given but one receives its cash equivalent only. Redemption of Gold ETF Units in the form of physical gold is allowed if the holding is equivalent to one kilogram or in multiples thereof.
“Gold has given a return of 11 to 12 per cent over 10 year period. It can be a hedge against market uncertainties and a useful portfolio diversifier. Gold can account for 10 to 30 per cent of the investment portfolio,” MS Shabbir, Investment Adviser, Sensage Financial Services.
Capital gains or returns from Gold ETFs are taxable based on the holding period of the investment. If they are sold before 36 months (short term), then the capital gains are taxable at the investors’ income tax slab rates. If the investments are sold after 36 months (long term), then the gains are taxable at 20.8% (including cess) after indexation benefits and 10% without indexation benefit.
Gold Mutual Funds
These are Fund of Funds (FoFs) that invest predominantly in gold Exchange Traded Funds (ETFs), which in turn invest in the physical gold of 99.5 or higher purity. A gold fund’s net asset value (NAV) is linked to gold price in the local market. Gold MFs allow systematic investment plan (SIP) as low as Rs 500. One can buy and sell gold MFs at the prevailing NAV at any time. However, the expense ratio is slightly higher compared to gold ETFs.
“Paper gold forms which include Gold ETF and GMFs are the safest and are easily liquidable. They are also cost effective,” says Krishna Pathri, certified financial planner, MoneyPurse.
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