There are four ways to put your money in gold — buying physical gold/jewellery, putting money in gold exchange-traded funds (ETFs), investing in a gold savings fund and going for the National Spot Exchange's e-gold. Now, some gold ETFs and e-gold even allow taking physical delivery of gold at the end of investment tenure. That might sound good if you wish to possess physical gold.
But, given the firm price of gold today (almost ~31,000 per 10g), it is important that gold is bought through acost-effective avenue. Reason: Investing comes at a price.
Add to that, India's gold buying is expected to decline in 2012 and 2013, according to the latest World Gold Council (WGC)report. WGC Director Vipin Sharma feels gold imports may drop to 800 tonnes from 967 tonnes last year. And the mix between the jewellery and gold investment will also change to see investment finding favour. WGC expects the country's gold markets to gain momentum in the festival season this year. Experts, otherwise, feel gold will be in demand and the prices will range between ~31,000 and ~35,000 per 10g till June 2013. So, you could keep accumulating gold in small portions across price levels.
Which is the most cost-effective way? If you ask the experts, they would unanimously favour paper gold more than physical gold — because, besides storage and safety issues, physical gold is costlier, too.
Sample this: If you want to invest ~10,000 in gold coin or bar this Diwali, banks will charge you 10-15 per cent higher than the market price. Jewellers will price it 5-10 per cent higher. The post office charges a premium of 15-20 per cent on gold coins. This means you lose between ~500 and ~2,000 if you go for any of these.
Instead, if you take the gold ETF route, your cost of investment will be ~500. Here's the break-up: Asset management companies charge one per cent as expense ratio (percentage of the assets spent to run a fund), demat account (a must for investing in gold ETFs) levies a maintenance fee of up to ~450 a year, there is a small transaction fee (for transacting through the demat account) at ~1 per lakh of transaction and a brokerage fee of up to 0.5 per cent.
If you opt for Motilal Oswal's ETF in lieu of physical delivery, you have to shell out an extra amount in case you redeem less than 1,000g of gold. You will have to pay ~750 per 10g of gold and ~250 per 100g of gold. In this case, your total cost will be between ~750 (500 + 250) and ~1,250.
The good part is mutual fund houses (like Reliance Mutual Fund, Quantum Mutual Fund, Religare Mutual Fund, IDBI Mutual Fund) now allow you to invest systematically.
However, if you invest through another mutual fund instrument, gold savings funds, you will need only ~150 a year, as the only cost levied is the expense ratio of 1.5 per cent. Gold savings funds are feeder funds. "If you do not have a demat account, gold feeder funds are a good option, as it does not make sense to open a demat account only for buying gold via ETFs," says Hemant Rustagi of Wiseinvest Advisors.
In comparison, e-gold, according to the National Spot Exchange's website, levies a transaction cost of ~20 per lakh of transaction, a storage cost of 60 paise per month per unit (which, if not paid, attracts an interest of 15 per cent a year — equal to interest cost for apersonal loan), delivery charge of ~200 per delivery/lifting (irrespective of number of coins/bars involved in the delivery instruction), making, packaging and refinery certification charges of ~200 (for eight- and 10g bars and coins) and ~100 for a 100g one. Also, you need to pay VAT/GST and other local taxes like octroi (0.1 per cent for Mumbai), if any, as may be applicable at the place of delivery on that date. According to the current rates, VAT will be one per cent of the value of goods.
Total cost comes to ~536. How? Assuming the total value of gold stands at ~10,000 and you hold 10 units, VAT and Octroi cost will be ~100 and ~10, respectively, and the storage cost will be ~6 per month. Add to that, transaction cost of ~20, delivery charge of ~200 and making charge of ~200 (for a 10g coin).
Therefore, a cost-effective investment avenue for buying gold this Diwali can be gold saving funds. Besides, you don't even need ademat account and can invest systematically in these funds. However, the problem with these is that they invest in gold ETFs of the fund house and, so, might not always outperform the ETF with a significant margin.
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