Indians have always been eager to invest in gold and this is an inexorable relationship. . It goes beyond festivals and special occasions. What is restrictive is that normally we tend to accumulate the metal as physical gold and jewellery and that has many limitations and costs associated with it. However there are more convenient opportunities to invest in Gold, such as gold exchange-traded funds (ETFs), fund of funds (FoFs). So make this Akshaya Tritiya different – choose a more convenient way to invest in Gold.
Gold could be a ray of hope during volatile markets
No doubt equity and debt should be a part of every investor’s portfolio based on their individual risk profiles, but allocation to alternate assets like gold fortifies the portfolio. Further, gold enjoys a lower correlation with other asset classes such as equity and debt and can act as an effective hedge when markets turn volatile.
As seen in Chart 1, investment concentrated towards single asset class like gold and equity can fetch better returns but also brings in greater risk. Investing only in debt can give stability to the portfolio but not higher-inflation adjusted returns. Hence, investors should diversify investment across debt, equity and gold which have potential to offer better returns and spread the overall risk to a greater extent.
Table 1: Returns and volatility
Returns – Average of 10-year
CAG RStandard deviation
on a daily rolling basis from 1997 to April 25, 2016 Volatility – CAG RStandard deviation
of daily returns from 1997 to April 25, 2016 Debt, equity and gold represented by CRISIL Gilt index, Nifty 50 and LBMA gold prices, respectively * Allocation between equity and debt assumed to be 50:50 ^ Allocation between equity, debt and gold assumed to be 45:45:10
Paper gold is more expedient than physical form
Investment in physical gold exposes one to the risks of theft, impurity and price uncertainty. Comparatively, paper gold investments offer greater price transparency and negate the risks of storage and theft. There are two investment options:
1) Gold ETFs are passively managed mutual funds that invest in standard gold bullion (99.5% purity). Their objective is to provide returns which, before expenses, closely correspond to returns provided by the local price of gold. In India, gold ETF assets increased from Rs 467 crore in December 2007 to Rs 6,346 crore in March 2016. The asset allocation of gold ETF is typically 90-100% in gold and 0-10% in money market instruments. However, performance of gold ETFs may differ from that of the price of gold due to expenses and certain other factors.
Advantages of investing in gold ETFs
Investors need to pay fees for fund management, demat facilities and other related charges. From a taxpayer’s standpoint, gold ETFs and physical gold attract capital gains tax similar to that of non-equity funds, i.e. taxed as per individual tax slabs before three years and long-term capital gains tax at 20% post indexation after three years
2) Gold FoFs invest in either their own gold ETFs or another gold ETF fund which is the mother fund. Gold FoFs offer all the benefits provided by gold ETFs - no risk of holding physical gold, affordability and liquidity. Investors need to pay fees for fund management. They are taxed as per individual tax slabs before three years and long-term capital gains tax at 20% post indexation after three years.
However, there are a few differences between the two:
1. Unlike gold ETFs, investing in gold funds does not require a demat account.
2. Gold FoFs are more liquid than gold ETFs as investors can directly surrender units to the fund house whenever they wish to and get the redemption.
3. Gold FoFs provide the SIP option, unlike gold ETFs, allowing investors to invest a fixed sum of money regularly and benefit from rupee cost averaging.
To reiterate, gold is a good risk diluter thanks to its low correlation with other asset classes. Investors would, however, be better off investing in the asset class in a disciplined manner in the paper form as per their risk-reward profile.
Any information contained in this article is only for informational purpose and does not constitute advice or offer to sell/purchase units of the schemes of SBI Mutual Fund. Information and content herein has been provided by CRISIL Research, a Division of CRISIL Limited, and is to be read from an investment awareness and education perspective only. The views / content expressed herein do not constitute the opinions of SBI Mutual Fund or recommendation of any course of action to be followed by the reader. Investors should consult their financial advisers before taking any investment decision
Mutual Fund investments are subject to market risks, read all scheme related document carefully.