New investment avenues in Gold Investment
India’s love for the gold is not a secret, having been a traditional practice even exercised today. Our forefathers use to buy gold on many auspicious occasions in the year and even today we continue to follow it. No doubt, it has always helped us in saving our hard-earned money and as they say gold is best investment asset in troubled times. The Idea is relevant till date and will be relevant in years to come, such importance gold carry’s in our life. The same Idea is followed at all levels from micro levels to macro levels. At micro level as a family tradition which is being followed for years to macro levels of country’s central bank accumulating large reserves of gold. Most of the time the key impulsion behind buying gold is hedging for future trouble and crisis like scenario ahead. But buying physical gold has huge costs related to it which hardly proves to be a good hedge against trouble times. Hence, Investors are flocking towards new type of gold investment avenues like ETF’s, Gold mutual fund, Sovereign gold bonds which prove to be less costly and can be easily liquidated. Let us explore these new investment avenues in gold and related instruments.
Gold acts as a best hedging strategy
Above charts depicts how gold prices have rallied in the past 1-year vs how the BSE Sensex has underperformed in the past 1 year. The gold prices have rallied 31% in past 1 year whereas the BSE Sensex has fallen by 17.5% in the same period. Reasons for markets to correct and gold to rally are same. But the investors always find gold as safe haven in troubling times like current, instead of adding more stocks at dipping levels. Gold prices and index prices have an inverse correlation most of the time and applicable to all global capital markets too, as Gold is seen as best hedging asset against the volatility found in the equity and other asset classes. However, In India we are always in favour of buying gold in physical form and not in paper or electronic form due to traditions attached to it. However, one should know if he or she wants to invest some money in gold as saving or for hedging purposes, the new gold investment instrument are the safest, provide liquidity also and bear low costs as compared to physical gold. Let us discuss in brief on all those instruments available for investing in gold.
GOLD ETF’s
Gold ETF’s are the exchange traded fund which tracks the price of physical gold. These funds invest in gold bullion and allocate units to the investors who have invested money into the ETF. Each ETF unit is represented by physical gold of the highest-grade quality. Gold ETF’s serve the purpose of investment for long term with low costs. Also, gold ETF’s are widely used across global financial markets. The ETF reserves have seen substantial spike in past few years showing shift in investment form of gold. According to world gold council, the gold ETF reserves saw an inflow of $9.3 billion taking the ETF reserves to all time high of 3355 tonnes in April 2020. Such is the demand for gold ETF’s in the world in recent times. The recent rise in gold prices was largely attributed to uncertainty over global growth due to pandemic of coronavirus in the world. Investors across the globe have flocked the money out of the money market and parked it to the gold ETF’s hedging against the correction in the markets.
Apart from hedging gold ETF’s have many other benefits, such as liquidity, purity, price, accessibility, etc.
Liquidity- Gold ETF’s are traded on stock exchanges and can be bought through demat account like stocks and also sold easily. They do not carry any lock in period and are traded on the NSE (National Stock Exchange) & BSE (Bombay Stock exchange) with high volumes. One can easily buy and hold or do trading also for short term like a stock.
No safety issues- Since, you buy it in the demat account through stock broker and not in physical form. You don’t have be worried about its safety and security. One can easily buy through exchanges and hold them for as long as they want.
Returns- Past 1-year gold has outperformed equity markets and has given more than 30% returns. Since, Gold ETF’s track the price of gold pan India, the returns from gold ETF’s are equivalent to the gold prices itself.
Accessibility- The gold ETF’s are traded on stock exchanges and can be bought through demat account and making it more accessible for all. Further, they do not carry any entry or exit load or minimum and maximum restriction of buying.
Risks- The risk in investing in gold ETFs is only about the price of gold which fluctuates according the situation around the world. Apart from that, gold ETF’s do not carry any entry or exit load and can be easily sold on the exchanges.
Gold Mutual Fund
Gold mutual funds which primarily invests in gold assets directly or indirectly. The investment destinations include gold reserves, gold mining companies and gold producing or distributing syndicates. The key benefit of investing in gold mutual funds is its diversification in investing in gold which sometimes also gives returns over & above the price of metal itself. It is the best investment asset for those with conservative investment approach by not taking much risk. Gold prices have increased substantially over the past few years giving them a sigh of relief in a time when equity markets had corrected 20% to 30% in the same period.
Like the gold ETF, gold mutual fund too has certain advantages like flexible investment, safety, Diversification, minimising risk
Flexible Investment- Gold mutual fund does not carry on minimum cap on investment. Anyone can invest with as small as Rs.500 amount in the gold mutual fund. Such flexibility and liquidity have made gold mutual funds popular amongst many as they serve the two major needs of any investor looking for better investment asset in the market which has good returns and also gives good liquidity at any point of time.
Safety- Gold mutual fund is like buying the gold in electronic form which does not carry any cost of holding it physically nor does any making charges which is the case with physical gold. Since, you get it in the form of units it has no chances of theft.
Diversification- Gold mutual fund proves to be the best investment asset class for diversification as the markets are in correction each fund. When markets are on the correction mode and so does other mutual funds who primarily invest in equity and other credit assets also give negative returns. At such times diversification into gold benefits the most as historical evidence also suggests that gold has acted as best hedging asset against the correction in equity market.
Cost- Cost of holding gold mutual fund is comparatively less than of holding a physical gold and also easy redemption policy makes it more accessible. The major cost in Holding mutual fund is covered in the expense ratio of the fund which is very low in the range of 0.5% to 1%. Hence, the net gain arising out of the rise in gold prices is much higher as compared to that of selling physical gold which mandatorily has deductions.
Same price – Gold mutual funds underlying asset is of 99% purity ensuring the quality and price of the product. Further, the price of underlying asset is same pan India. Unlike physical gold where prices vary in various regions.
Having a 10% to 20% exposure to gold mutual fund in normal market scenario benefits you in the bearish phase of equity markets. One can easily allocate the 10% to 20% of the funds towards the gold funds as best hedging strategy. Further, if you are a conservative investor and are not willing to take much risk, then gold mutual funds are also one of the best investment options for you.
Sovereign Gold Bonds
Sovereign Gold Bonds are another one of the best investment avenues in the gold for investors looking at a long-term investment. The Sovereign gold bonds are issued by the Reserve Bank of India on behalf of government of India under its borrowing programme. These are government securities which government issues time to time to raise the money from borrowing from the public with maturity period. Sovereign gold bonds have maturity of 8 years and have facility of exiting only after 5 years of the issuance. These government bonds are tradeable government securities denominated by the price of gold or 999 purity as gold being the underlying value asset. However, the government securities are not backed by physical gold prices. The issue price of the securities is calculated by averaging of last 3 working days of gold. Similarly, at the maturity the price for redemption is also calculated in the same manner.
The most important benefit of the sovereign gold bonds is the 2.5% interest added each year on the investment amount. The interest allocated each year is not reinvested into the gold bonds. However, the returns generated at the maturity are over and above the returns generated by gold ETFs and gold mutual funds. The only limitation and key difference are of liquidity which the other two investment avenues provide and sovereign gold bonds can be exited only after 5 years of the issuance. Below are some key benefits of investing in sovereign gold bonds
Cost efficiency- As compared to gold ETFs and gold mutual funds the cost of buying sovereign gold bond is very low. If a person holds the bonds till maturity, he is exempted from capital gains tax, which is applicable to gold ETF’s and gold mutual fund depending on tenure of investment. Secondly, there is not expense ratio for the sovereign gold bond since it is not backed by any physical gold and being the pure government security, which increases the net gain of the investments made.
Investing limitations-The sovereign gold bonds can be subscribed by anyone who is resident Indian or any trusts, organizations, charitable institutions, etc. Each of them has been given minimum and maximum investment limit. An individual can subscribe for minimum 1 gram to 4 kilo grams of gold, where as trusts, organizations, charitable institutions can invest up to 20 kilograms of gold.
Returns- Sovereign gold bonds generate little higher returns as compared to gold ETF’s and gold mutual funds over period of long term due to waiver of tax, fixed interest rate of 2.5% per year and not expense costs added in the value and cost of inflation added over period of 8 years. The sovereign gold bonds have outperformed other two assets.
The sovereign gold bonds provide a necessary security to your savings being the government security. Secondly, it also gives added benefit of interest rate each year on initial investment amount. Putting all above things together the gold bonds are the best investment avenue for those long-term conservative investors who want capital protection and don’t have any liquidity requirements in short term and expect a steady return over long term
Recent reports suggest a 36% decline in physical gold in India in Q4FY2020 quarter, gives an idea about shift of preferences towards the digital gold. Investing in electronic gold or gold bond is not only beneficial for us as individual but also as benefits largely as economy. It helps us save millions in foreign exchange by reduction in our import bill as gold and oil are the two major contributors to our import. The shift is largely visible on global level too as the reserves under gold ETF’s are at all time high levels and the physical gold purchases made by the nations are also on a declining side in past few quarters. Indians have fond of gold purchasing for securing the better future and it will continue to do in decades to come. However, the form of purchasing gold will moderately shift towards the electronic gold too.
