Smart Ways to Invest in GOLD

Gold in Physical Form is an illiquid Investment

Traditionally, families saved in gold by buying jewellery. But with high making charges, investing in jewellery is not the smart thing to do. Making charges, together with the price of the precious stones in the gold jewellery, eat into returns.

Aside from all this, gold in physical form is an illiquid investment — jewellers don’t pay cash for the old jewellery. And then, if you keep the jewellery in a bank locker, there are rental charges to deal with.

Enter the MMTC-PAMP

Many players today offer a digital platform to buy gold directly from MMTC-PAMP, a Joint Venture between MMTC (a Government of India undertaking) and PAMP (a global refiner in gold). Motilal Oswal’s Me-Gold is one such digital platform.

You can buy gold for as less as Rs. 1,000 or 0.3 grams. Orders for buy/sell can be placed any time of the day and all seven days of the week. When you place a ‘buy’ order through the app, MMTC-PAMP buys an equivalent value of hallmarked gold in your name and stores it in its vault.

When you decide to exit, you can sell your gold back to MMTC-PAMP through a ‘sell’ order in Me-Gold. You can also redeem gold in physical form in multiples of 1 gram by paying extra for making charge and it will be delivered at your registered address.

Payments apps Paytm, PhonePe, MobiKwik and Google Pay also offer a digital platform to buy gold from MMTC-PAMP. However, there are a few restrictions. One, the maximum period for which you can store your gold at MMTC-PAMP is only five years. Also, every platform has a frequency in order to keep the account active – in case of Me-Gold, if there is no buy/sell/redemption order for 18 months, it will be deemed inactive and the money refunded by liquidating the gold at the then prevailing price. And there are transaction charges on these digital platforms.

Sovereign Gold Bond (SGBs)

For those eyeing returns on investment in gold, sovereign gold bonds are the best option today. You get interest at 2.5% per annum on the face value of the bond.

This means that when gold prices go up, you get the twin benefits of price gain as well as interest, and when gold prices fall, you are not impacted as much as your peers who invested in physical gold, as you will get the interest on the bond.

These bonds are issued by the Reserve Bank of India (RBI). Everyone except for non-resident Indians (NRIs) can invest. Investment in these bonds can be made through cash (up to Rs. 20,000), cheque or demand draft. The bonds are issued in denominations of one gram and in multiples thereof. Maximum investment in a year is capped at 4 kg for individuals.

The RBI fixes the price of the bond. You can buy these bonds from banks, the Stock Holding Corporation of India, designated post offices and the National Stock Exchange of India and the Bombay Stock Exchange.

The investment tenure of the sovereign gold bonds is eight years. Premature exit is allowed from the end of the fifth year. Investors who want to exit early, can sell the bond in the secondary market.

Gold ETFs

Gold exchange traded funds (ETFs) are another way to invest in gold. These are units of mutual fund schemes.

You can buy/sell these units through a share broker, provided you have a demat and trading account. Each of the nine mutual funds, who have gold ETFs listed on the BSE and NSE, have issued units of gold to subscribers during their new fund offer (NFO).

From the time of listing of these ETFs in the bourses, selling/buying happens at the market price between the existing holders of the ETFs and the new subscribers.

These ETFs track the domestic price of gold. However, depending on the demand/supply of these units in the market, they can trade at a discount/premium to the market price or net asset value (NAV) of the fund. Also note that though the cost of investment in gold ETFs is cheaper than that of investing in gold in physical form, you will need to pay the fund management charge and service charges of the broker. If you are opening a demat account specifically for investing in gold ETFs, then demat account charges will also have to be factored in your total costs. You also need to be aware that some of these funds have high tracking error because of their cash holdings.

Thus, when you sell, you may not be able to exit at close to the market price of gold.

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PS:Investments of any kind have their own set of pros and cons. For gold investment, the safety and security of physically protecting the gold can be risky and cumbersome. Get clarity as to why you need to invest in gold – is it for marriage purpose or for pure investment. For investments, one should not have more than 10 percent of the total portfolio in gold. Choose between Gold ETFs or SGBs depending on how comfortable you are managing investments online and keep the worries of purity, security aside.