Buying gold is more convenient now

My article in Mid-day Gujarati's Mumbai edition today:

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The English translation is as under:

The festival days are here. This is the season of buying Gold in many Indian families. Buying gold for investment purposes was highly inconvenient at some point in time, as the laws did not allow one to buy gold in any for other than jewelry. Today, it has become very convenient to invest in gold.

Buying physical gold has its own limitations.

Most of us cannot make out the difference between 18 carat gold and 24 carat gold. The price difference could be very high between the two. We can buy certified gold, as that facility is available now. However, this facility comes with a price. Any additional price paid reduces the future returns from the investment.

Physical gold also needs to be stored properly, as the precious metal suffers from the risk of theft.

Physical gold has to be added to one’s wealth for the purpose of calculating wealth tax. Thus, if the total wealth exceeds the minimum cut-off limit, one would be required to pay wealth tax irrespective of whether one is earning on the same or not. A tax outflow is an expense and it brings down the return on investment.

A recent innovation has taken care of the above limitations. (Although, this is a decade old innovation, many do not know about it). This innovation is known as Gold ETF – a mutual fund scheme that allows one to participate in the growth of price of gold. It is a financial instrument through which one can reap the benefit of investing in gold.

Gold ETFs are mutual fund schemes that invest in physical gold and issue units against these to the scheme’s unitholders. The gold is stored with a SEBI registered custodian. Periodic audits are carried out to ensure that for each unit of Gold ETF, there is an equivalent quantity of gold available with the custodian. The NAV of the unit varies in line with the price of gold in wholesale commodities market. The unit of a mutual fund is defined as “security” and hence is exempt from wealth tax. Since the gold is stored with a custodian and the investor only holds demat units, the risk of theft is eliminated.

These units can be bought through the stock exchanges with the help of member brokers. One needs to have a demat account for this purpose as the units purchased through stock exchanges are delivered only in demat format.

The mutual fund companies innovated further and introduced another category of mutual fund schemes that allows an investor to hold the units through an account statement without the need for a demat account. These are popularly known as gold savings funds.

Take advantage of these innovations to accumulate units of gold.

With you all a very Happy Diwali and a Prosperous New Year!

Note: This article is not about whether gold is a good or a bad investment. It is about a new and convenient way of investing in gold. At the same time, it is important for one to understand why one is buying gold.

Amit Trivedi

The author runs Karmayog Knowledge Academy. The views expressed are his personal opinions.