Tania Kishore Jaleel / Mumbai October 18, 2011, 0:03 IST
Due to lower transaction costs and tax benefits, net returns are better.
If you are looking to buy gold this festive season, ask yourself these
questions. Do I want to buy it for consumption or investment? If
consumption, then is the need immediate or can it be waited upon for
the next couple of years or more? The answers to these should help you
decide your course.
Though festive season means buying gold for consumption purposes, a
lot of people do look at investing in it too. For consumption,
jewellery is the only option. But if the consumption is deferred, one
can look at systematic investment plans (SIPs) in gold through
commodity exchange. You can invest small units, even one or half a
gram. Or, there is the jeweller who puts up offers of paying monthly
and buying the jewellery item at the end of tenure (one to three
years, usually). So, in the immediate or near future, one can look at
buying jewellery directly or avail of the jeweller’s option. But if
the tenure is longer, go for SIP.
For pure investment purposes, gold ETF and gold funds (fund of funds)
are mutual fund schemes that would allow you to invest in gold without
actually owning gold physically. These have given phenomenal returns
this year. According to Value Research, gold funds have been the best
performing category in the last one year. These have given investors
returns of 33 per cent in the last one year.
"Gold ETFs are traded on the exchange platform and, therefore, mean
low costs of trading to the investor. An investor can invest in very
small amounts and physical delivery is possible for units equivalent
to a kg of gold and above", says Ritesh Sheth, fund manager at SBI
mutual fund.
There are 13 gold ETFs and gold funds one can choose from. Together
they have assets worth Rs 7,800 crore.
There are other advantages of owning units of gold ETFs. "There is no
worry of storage or thefts as they are in demat form. Units of ETFs
will not depreciate when you sell. While buying physical gold, you are
at the complete mercy of the jeweller on pricing, but in an ETF, the
underlying gold price is the same. Though the asset management charges
may vary from fund house to fund house", explained Naveen Mathur,
Associate Director of Commodities at Angel Broking.
You can pick the fund with the least expense ratio. The expense ratio
of these funds can be anywhere between 0.25 and 1.50 per cent.
When you purchase gold coins from a bank, you need to pay a premium of
five to seven per cent, which is not the case in gold ETFs.
"Since gold ETFs are mutual fund units, no wealth tax is applicable on
them. If you have physical gold of more than Rs 15 lakh as part of
your wealth, one per cent wealth tax will be levied", says SBI's
Sheth.
Also, long-term capital gains benefits are there for ETFs after one
year, while the physical gold kicks in after three years. So, if you
look at all the operational issues, tax issues, ease of management,
one should consider gold ETFs as an investment option this festive
season.
Net returns of gold ETFs will be higher, says certified financial
planner Arnav Pandya. "When buying gold coins or jewellry, about four
to five per cent is eaten away on transaction costs, due to which the
net returns come down. The cost of transaction on ETFs is lesser", he
adds
Due to lower transaction costs and tax benefits, net returns are better.
If you are looking to buy gold this festive season, ask yourself these
questions. Do I want to buy it for consumption or investment? If
consumption, then is the need immediate or can it be waited upon for
the next couple of years or more? The answers to these should help you
decide your course.
Though festive season means buying gold for consumption purposes, a
lot of people do look at investing in it too. For consumption,
jewellery is the only option. But if the consumption is deferred, one
can look at systematic investment plans (SIPs) in gold through
commodity exchange. You can invest small units, even one or half a
gram. Or, there is the jeweller who puts up offers of paying monthly
and buying the jewellery item at the end of tenure (one to three
years, usually). So, in the immediate or near future, one can look at
buying jewellery directly or avail of the jeweller’s option. But if
the tenure is longer, go for SIP.
For pure investment purposes, gold ETF and gold funds (fund of funds)
are mutual fund schemes that would allow you to invest in gold without
actually owning gold physically. These have given phenomenal returns
this year. According to Value Research, gold funds have been the best
performing category in the last one year. These have given investors
returns of 33 per cent in the last one year.
"Gold ETFs are traded on the exchange platform and, therefore, mean
low costs of trading to the investor. An investor can invest in very
small amounts and physical delivery is possible for units equivalent
to a kg of gold and above", says Ritesh Sheth, fund manager at SBI
mutual fund.
There are 13 gold ETFs and gold funds one can choose from. Together
they have assets worth Rs 7,800 crore.
There are other advantages of owning units of gold ETFs. "There is no
worry of storage or thefts as they are in demat form. Units of ETFs
will not depreciate when you sell. While buying physical gold, you are
at the complete mercy of the jeweller on pricing, but in an ETF, the
underlying gold price is the same. Though the asset management charges
may vary from fund house to fund house", explained Naveen Mathur,
Associate Director of Commodities at Angel Broking.
You can pick the fund with the least expense ratio. The expense ratio
of these funds can be anywhere between 0.25 and 1.50 per cent.
When you purchase gold coins from a bank, you need to pay a premium of
five to seven per cent, which is not the case in gold ETFs.
"Since gold ETFs are mutual fund units, no wealth tax is applicable on
them. If you have physical gold of more than Rs 15 lakh as part of
your wealth, one per cent wealth tax will be levied", says SBI's
Sheth.
Also, long-term capital gains benefits are there for ETFs after one
year, while the physical gold kicks in after three years. So, if you
look at all the operational issues, tax issues, ease of management,
one should consider gold ETFs as an investment option this festive
season.
Net returns of gold ETFs will be higher, says certified financial
planner Arnav Pandya. "When buying gold coins or jewellry, about four
to five per cent is eaten away on transaction costs, due to which the
net returns come down. The cost of transaction on ETFs is lesser", he
adds
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