With the government pulling out all stops to curb gold imports, it is not very patriotic to buy gold now. But it is still hard to ignore gold’s return record in India. The metal has given an annualised return of 18 per cent in the last five years. Owning 5-10 per cent of your investment portfolio in gold helps shield it against a volatile stock market (gold and stock often move in opposite directions) and a weak rupee (domestic gold prices gain with every fall).
Jewellery may seem to be the most obvious choice here but comes with stiff costs. Both at the time of buying as well as re-sale, you will lose out on making and wastage charges in jewellery, adding up 15-20 per cent. This is over and above the domestic gold price which is already poised at a 15 per cent premium to global markets.
Jewellers also offer gold savings schemes which allow you to buy a few gm of gold every month, with special ‘offers’ such as ‘no making charges’ or a waiver of the last instalment. But these gold purchases can only be swapped for jewellery at the end of the tenure. What is more, as these ‘savings’ schemes are not regulated by the RBI or any other regulator, there could be risks attached.
Stiffer regulations
If you are keen to invest ETFs appear to be the most cost-effective option despite the recent spike in their market price. There are 14 listed gold ETFs in the country holding a little short of 40,000 kg of gold. While these fund houses are not creating new units, nothing prevents you from buying gold units in the secondary market. If it is the plight of the e-gold investors of the National Spot Exchange that is stopping you from investing in gold ETFs, don’t worry, there are stiffer regulations in place for gold ETFs.
These schemes fall under the purview of the Securities and Exchange Board of India (SEBI). SEBI’s regulations for Gold ETFs specifically lay down that physical verification of gold underlying the ETF units should be done by the statutory auditors of the mutual fund houses and reported to trustees and SEBI on half-yearly basis. Also, the gold should be in the custody of a bank which is registered as the custodian.
The other question is whether you should invest in gold ETFs now when they are quoting at a premium. Long-term investors can buy at any price because these differences will get evened out if you are going to hold for 10-15 years. But, investors with a short-term view can avoid gold ETFs now as improving supplies, if the government relaxes curbs, may whittle down the premium.
The government has also announced plans to make inflation indexed bonds more attractive for investors by linking interest rate to CPI. When that happens, it could replace some of that gold in your investment portfolio.