Investing in demat gold!

By BankBazaar | May 16, 2012

Uncertainty in the global markets, slower recovery of developed economies, volatility in the stock market and sub-optimal economic policies across the countries has forced people to find safer havens for investment. This is where gold scores over other investment options. Not only people, but nations also repose their faith in gold.

Gold has been making waves since S&P downgraded credit rating of USA from AAA to AA+. The media, brokers, and bullion traders have been predicting various numbers which gold will touch subsequently. We are not going to predict the price of gold in this article but we will provide some avenues for investing in gold for people who do not want to own physical gold. Gold can be bought by many other ways.

Some of these ways include:

Gold ETF

Gold ETFs are `Exchange traded Funds’ which are equivalent to mutual fund units. Each unit is equivalent to 1 gm. of gold but some fund houses have 0.5 gm. of gold as one unit. The price is almost half per unit for these fund houses’ gold ETFs.

The gold ETF can be bought or sold just like mutual funds using your regular demat account with any depository. The NAV is displayed periodically for the gold ETF just like mutual funds. The gold behind the ETF has a quality of 99.9%. This means you do not have to worry about the quality aspect. Buying gold from outside is fraught with risk as you have to rely on the goodwill of the seller.

The advantage of Gold ETF is that you do not need to worry about the safety and storage as you would in case of physical gold. This is also very liquid compared to physical gold as the physical gold has to be taken to the buyer and sold. The other advantage is that you do not need lot of money to invest in a Gold ETF. It is also more tax efficient compared to physical gold. You need to keep physical gold for 3 years to claim long term benefit s while the tenure is just 1 year in case of Gold ETFs.

Kotak Gold ETF, UTI Gold ETF, and Reliance Gold ETF are some of the examples of gold ETFs in the Indian market.

E-Gold

National Spot Exchange Limited (NSEL) allows investors to buy gold, silver, and copper in electronic form, also known as e-Gold, e-Silver, and e-Copper. It also plans to induct more metals in future.

This facility allows investors to buy gold in a dematerialized form. The trading session is from 10:00 AM to 11:30 PM and hence investors can do it at their convenience.  Investors can buy in the lot in 1 unit of e-Gold which is equivalent to 1 gm. of gold. The purity is 995.

You have to open a separate demat account from a list of depositories. The list of depositories can be taken from the NSEL website. Please go to the link for more details about e-Gold.

http://www.nationalspotexchange.com/NSELUploads/Trading_Doc/2010/Circular041_2010.pdf

The investors may choose to sell the e-Gold whenever they want and get the cash or may take delivery in physical form from any of the NSEL designated centres. Currently the de-materialization centres are there in Mumbai, Delhi, and Ahmedabad and will soon be opened in major cities across India.

Gold Funds and Fund of Funds

Gold funds are just like mutual funds run by a fund house. The advantage of a gold fund is that investors do not need a demat account to invest in a gold fund. In the case of gold ETFs, investors do need to have demat account before they can buy it. The NAV of the fund will be benchmarked against the price of gold. With low penetration of demat account in India, Gold fund is a good option for people who do not have a demat account. This gives you all the benefit of virtual gold such as no storage cost and safety concern. However, keep it minds costs and advantages before you decide which is best way to invest for your needs.

There is another option called gold FoF ( Fund of Funds). These funds invest in various gold ETFs. The NAV is determined by the weighted average of the NAV values of various ETF that the fund of funds consists of.

Final words

While the investing the world is bullish on gold in the near future, you have to consider your own situation before you invest in gold. Remember that the returns from gold don’t come by dividends and bonuses but purely by price appreciation. Price appreciation is a function of market sentiments in the case of gold as there is no fundamental income projection in future unlike that of a company. Treat gold as a great way to store value.

All information including news articles and blogs published on this website are strictly for general information purpose only. BankBazaar does not provide any warranty about the authenticity and accuracy of such information. BankBazaar will not be held responsible for any loss and/or damage that arises or is incurred by use of such information. Rates and offers as may be applicable at the time of applying for a product may vary from that mentioned above. Please visit www.bankbazaar.com for the latest rates/offers.

One thought on “Investing in demat gold!

  1. nabil

    Good article however please mention what is the cost of holding in the above schemes say over 1,2 years and then selling, looking into tax implications etc

    Reply

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