Capture That Glitter Forever

How to invest in gold, benefit from its unique qualities, and, also keep your investment portfolio shining By Kavya Balaji, Kundan Kishore and Sunil Dhawan Since time immemorial, Indian parents have gifted jewellery to their soon-to-be-wed daughters so that it helps in financial rough weather. But does this conventional wisdom truly translate into a financial advantage? Renisha Chainani, commodity analyst, capital markets, Edelweiss Financial Services, says: Most gold jewellery is made of 18 or 22-carat gold. Plus, jewellery contains add-ons, such as precious stones, which increase its weight but not value, and jewellery also has a low liquidity quotient (i.e., the ease with which it can be converted into cash). Add to that the likelihood of jewellery getting old-fashioned and depreciating in value because of wear and tear. Recently, Chitra Swaminathan, 51, a home maker, refashioned her jewellery before gifting it to her just-married daughter in the US as her old jewellery looked obviously outdated. Given these travails, how does one invest in gold, which has provided a one-year return of 29 per cent and 123 per cent return since early 2009? After all, it always pays to have a diversified portfolio with a judicious mix of equity, debt, real estate and gold. Unbankable Banks Banks sell gold coins and so do post offices and jewellers. But actually, banks sell gold coins at a premium and dont repurchase, leaving you at the mercy of the jeweller you want to sell to. Chainani says: Jewellers buy coins at a low price and sometimes also charge melting costs. So, how do you buy gold? You can follow the example of Sumathi M, 53, a bank employee from Chennai, who opened a recurring deposit account every six months with whose maturity proceeds she bought gold. In this way, she accumulated around 300g of gold in 15 years that averaged out her cost of buying. I also bought coins whenever gold declined by more than 2-5 per cent, she says. Neelam Ashish, 32, who works for a news channel, is also a smart gold buyer. However, she prefers gold bars since there is less scope of losing money while selling them. But one should buy only 24 carat gold (considered 99.99 per cent pure) hallmarked

by the Bureau of Indian Standards. Genuine bars and coins are embossed with a registration number and a stamp of the manufacturer, and also specify the weight and purity. But this will involve a trip to the jeweller. Alternatively, you can buy gold exchange-traded funds (ETFs). They are issued by mutual fund (MF) houses and can be bought and sold like MF units and traded on the bourse like any other stock. When you buy a unit in a gold ETF, the fund house allots you units against your name. Besides offering purity, safety and liquidity, they allow you to invest in gold at different prices. They score over physical gold on taxes too. In case of physical gold, for short-term capital gains, i.e., for periods below three years, tax is calculated on the basis of your tax slab. Long-term capital gains tax is applicable at 10 per cent with indexation and 20 per cent without indexation. Lalit Nambiar, senior vice-president and fund manager, UTI Mutual Fund, says, Educated women are moving towards paper gold for investment benefits. Avantika Singh, 26, a banking professional, who intends to marry in two years time, invests in gold ETFs much against the advice of her mother, Rajani, who prefers jewellery. She says: I can redeem them and buy jewellery of the latest design after two years at todays cost even if gold prices rise. Most ETFs allow you to convert your units into physical gold after you have accumulated units equal to 1kg of gold. But the recentlylaunched MOSt gold shares ETF from Motilal Oswal Mutual Fund offers physical delivery of gold even for units equivalent to 10g of gold. Nitin Rakesh, till recently the MFs chief executive officer, says: Most retail investors invest in gold in small quantities. This fund helps them take physical delivery of gold in small quantities at low prices. Some like Deepali Mogarkar, 30, a Pune-based software engineer, invest in gold every month for their childs marriage. Mogarkar intends to gift her daughter Aashi, 3, with the jewellery of her choice when she grows up. Fund of Funds A demat account is a must for investing in gold ETFs. But if you dont have one, you can, like Supriya Singh, 27, an IT professional, invest as little as 500 every month in a gold fund of funds through systematic investment plans (SIPs). This MF scheme invests in units of gold ETFs of a parent company and gives returns closely corresponding to those very gold ETFs. Lakshmi Iyer, head of products & fixed income, Kotak Mutual Fund says: It gives you exposure to gold for as little as 500 without a need for a demat account. Buying e-gold and others For people like Lakshmi Sekar. 35, who face paucity of time, e-gold is a good alternative. Sekar says, I can buy gold even late at night. E-gold is electronic gold, where one unit is equal to 1g of metal. You can purchase e-gold from the National Spot Exchange using your demat account and convert it to physical form when needed. You can invest in e-gold through an SIP. Besides, you get returns equal

to physical gold and also there are no holding charges. Sanvali Kaushik, chief products & strategy, Ace Commodity Exchange, says, e-Gold bridges the gap between using it for investment and the traditional reasons to purchase it. There are other advantages too, that of low transaction charges, high liquidity and low minimum investment. Gold futures Savvier investors, who are not averse to taking risks, can shift to gold futures. These are contracts to buy gold at pre-determined prices on pre-determined dates. So, if you think gold prices will go up to 3,000 for 1g in a month, you can purchase a futures contract today to buy gold at 2,700 then. Based on your needs, you can opt for either cash or physical gold. Kaushik says, Gold futures can be utilised to reduce portfolio volatility. How much gold? Suresh Sadagopan, principal financial planner, Ladder7 Financial Advisories, says: Ideally, one should allocate 5-10 per cent of ones portfolio to gold. Try to dovetail your gold investments with that of your spouse. Nevertheless, do remember that too much of a good thing, even gold, is bad for you. Credit- Outlook Money kavya.balaji@outlookindia.com kundan@outlookindia.com sunildhawan@outlookindia.com