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Gold has proven to be a safe haven investment option not only because of it being a hedge against inflation, but also due to its low correlation with other asset classes, such as equity and debt. Gold has provided annualised returns of 19% over the past 10 years vis-àvis 17% by S&P CNX Nifty. Indian investors now have the option of buying gold in dematerialised or paper form, which also negates the risks of storage and theft.
Three paper gold options in India:
Gold ETFs
These are passively managed mutual funds that invest money in standard gold bullion (99.5% purity). In India, assets managed under gold ETFs have increased over 10-fold from . 780 crore in February 2009 to . 9,900 crore in March 2012 (this includes mark-to-market gains of 76% during the period). Since they are traded on exchanges, gold ETFs provide high liquidity and transparency in prices. Investment in gold ETFs requires opening a demat account with a broker registered with BSE or NSE.
Gold Mutual Funds
These are fund of funds (FoFs) that invest the corpus in either their own gold ETFs or a foreign gold fund which is the mother fund. Gold mutual funds provide investors the facility of systematic investment plans (SIPs), wherein they may invest in gold regularly and avail benefits of rupee cost averaging, i.e. buying more units when prices are low and less units when prices are high. Currently, Indian fund houses offer 11 gold FoFs (including two foreign FoFs), managing average assets of . 4,700 crore as of March 2012 (includes average AUM of . 1,100 crore by foreign FoFs). Within a year of the first gold FoF being launched, this segment forms 50% of the assets under gold ETFs. It also gives retail investors an opportunity to invest in paper gold in amounts as small as . 500 (via SIPs) and without having to open a demat account (unlike gold ETFs).
E-Gold
Investors can purchase gold in electronic form via e-gold — a product launched by the National Spot Exchange (NSEL). Investors in e-gold can buy and sell gold in denominations as small as one gram. A major advantage of e-gold is the investor gets an option to convert paper gold into physical gold in addition to all the perks of investing in gold in the paper form.
What makes Gold Popular?
Gold has demonstrated its ability to generate returns higher than inflation and thereby act as a strong hedge. One, it has given consistently positive year-on-year returns in the past 11 years. Two, other asset classes have been more volatile, with equity and debt even giving negative returns in some years during this period. Gold as an asset class diversifies an investor's portfolio and limits the downside risk in times of uncertainty.
Tax
Gold ETFs and gold FoFs are subject to long-term capital gains (LTCG) tax of 10% without indexation and 20% with indexation if held for more than a year and taxed as per individual income tax slabs for short-term capital gains (STCG) if held for less than one year. LTCG is taxed at 20% in case of physical gold and E-gold and investors need to hold them for more than three years to qualify for the same. STCG is taxed as per the individual tax slabs if sold within three years. In addition to this, wealth tax of 1% of the market value of the assets exceeding . 30 lakh is charged on investment of physical gold and E-gold.
Gold as an asset class not only provides stability to returns but also gives an opportunity to maximise wealth over a longer timeframe. However, in the short-term, gold prices can be volatile due to demand-supply concerns and economic conditions owing to which investors need to adopt SIPs over longer timeframes of five years and beyond. The percentage allocation to gold should depend on an investor's risk and return objectives.
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