How to invest in Gold

The sheen of returns from investing in gold makes it impossible for anyone to miss out investing in the yellow metal. Specially this past decade- the prices of gold have gone up nearly 6 times. The graph shows CAGR of 34.39% for the past two years.
  
Gold provides a perfect hedge against inflation. Also it is the most sought after asset class in times of volatility and market crashes. One cannot avoid having gold as an important element in one’s portfolio - only the proportion would differ with stage of the life cycle.
  

        
There are many ways of investing in Gold. But then, each of them has its pros and cons.
 
Physical gold: Investing the household savings in gold jewellery is an age old tradition in Indian families.
Pros
1. It gives us a mental satisfaction of possession
2. It carries with itself a beauty and ornamental value
3. Emotional value is attached.
Cons
1. High development charges account for wastage
2. Purity has to be verified before purchasing
3. Storage and security issues and the connected costs do not make this option viable
4. Resale valuation issues for out of fashion designs.
                  
 Gold funds: These days you have option to invest in gold funds. Two latest funds-Kotak gold fund and Reliance gold fund give you this flexibility. There are also many Gold funds which invest in gold mining companies for example Blackrock Global Funds, World Gold Fund and the AIG World Gold Fund.
Pros
1. Comes with SIP flexibility
2. No DEMAT required
3. Good for conservative investors
Cons
1. Double charges-for mutual fund scheme and for ETF both
         
ETFs: ETFs are exchange traded fund like mutual funds, but here the NAV keeps fluctuating the whole day and you can sell and buy anytime you want.
Pros
1. No responsibility of security and insurance
2. You do not have to worry about the purity of gold since it is guaranteed by the LBMA (London Bullion Market Association)
3. Pricing is not an issue since you can buy and sell as and when you feel
4. No STT, VAT, sales tax and wealth tax.
Cons
1. ETFs attract long term capital gains tax.
               
Commodities market: Investing in commodities market is good for those who are well versed with the idea of trading in commodity spot and futures.
Pros
5. Good returns can be expected
6. Good for diversification of portfolio
7. Good for investors how already have a DEMAT account
8. Good for investors who want to stay away from the stock market
Cons
2. Time is required to invest and understand
3. Good understanding of spot and futures is also required.
4. Forecasting ability and of importance
5. No suitable enough for a small investors.
                             
Investing in mutual funds sound obvious but there are some crucial factors you should look at:   

• Mutual funds trade at NAV at the end of the day, whereas ETFs give you the flexibility to trade intraday.
• With ETFs, it is simple to trade because of one price that is involved. But with mutual funds, the underlying shares are constantly being traded and the price keeps changing which is quite a bit complex to track.
• ETFs are more cost effective than mutual funds. Mutual funds are actively traded and actively managed mutual funds are thus expensive. Gold, does not need to be actively managed that way and so, is a cheap investment haven.
• With mutual funds, come in investment styles and trading strategies of different mutual funds houses, a hassle for an investor to be dealt with. Nothing as such happens in gold ETFs. Gold does not need any investment strategies.
• Now since ETFs need not be managed like mutual funds, their expense ratio is much lower than mutual funds. Management expenses and trade commissions are nit as high.
• In terms of purchasing and investing, mutual funds do require a minimum amount to be invested, which is not the case with ETFs.

Investing in Gold ETFs is very simple. It is similar to how you buy shares, i.e. you need to register yourself with a broker having membership of the NSE, fill up the KYC form, open a demat account, post margins and commence trading. If you have an existing Demat account you can use the same.      
       
Following is the list of gold ETFs listed on NSE:

• Gold Benchmark ETF
• UTI Gold ETF
• Kotak Gold
• Reliance Gold ETF
• Religare Gold ETF
• Quantum Gold
• SBI Gold ETS
• HDFC Gold ETF

             
A comparative analysis of some leading Gold ETFs:
                  


















Source: Valueresearch Online