Gold is one of the most important investment assets in India. Over a long period of time gold is supposed to retain its purchasing power and is, therefore, seen as one of the safest assets in our country.
For Indians, the two most popular forms of gold investments in India are buying gold jewellery or buying gold bars and / or gold coins. While buying gold jewellery is the traditional form of gold purchase, it involves making charges and risk of impurities. Many families start buying gold jewellery for their daughter’s wedding from a young age. However, by the time the girl child will reach marriageable age, fashion trends are likely to change and the parents may have to remake the jewellery for the wedding.
When you remake a piece of jewellery or melt your jewellery to get a new design, the jeweller considers only the weight of gold to value the total price and no consideration is given to the making charge that you paid earlier. Further, most of the jewellers deduct the impurities from the value of gold as it invariably contains impurities. For the new jewellery, the jeweller will price the making charge which is based on the weight of the gold and the cost of gold; he will adjust the value of the old gold minus impurities from the price. So, if you remake gold jewellery, you will have to pay making charges twice and also pay for impurities. Therefore, purely from an investment standpoint, buying gold jewellery is not a prudent investment decision.
Therefore, Gold in the form of bars and coins are more suitable for investment purposes because they do not contain impurities and no making charges are involved. However, buying gold in physical form involves the cost of storage and also risk of theft. In order to avoid the risk of theft, you may prefer to keep the physical gold in bank lockers but for which you have to pay annual locker charges to the bank.
Therefore, to avoid all of the above and yet invest in gold as a financial asset you can buy gold either in the form of Gold ETF or Gold fund of funds. Gold ETF is an exchange-traded fund (ETF) that aims to track the price of gold in the market and has the same value of pure 24 carat physical gold. The units of the Gold ETFs are traded on the stock exchange (NSE and BSE) just like listed shares of any company. However, to buy and sell Gold ETFs on the stock exchange, you need to have demat and trading account with a stock broker and if you do not have a demat and share trading account, then you can invest in Mutual fund Gold fund of funds. Gold fund of funds are mutual fund schemes which invest in Gold ETFs and are just like any other open ended mutual fund scheme.
Since Gold ETFs have the same value as pure physical gold and there is no associated cost such as making charges or impurities, so when you sell the Gold ETF you get the value of pure gold.
The units of gold ETFs gets credited to your demat account and thus there are neither is any storage costs involved nor the risk of theft. Gold ETFs are the cheapest and safest way of investing in gold as an investment option.
See the gold fund returns here