Opt for These Wise Ways to Buy Gold This Dhanteras

Time to read: 5 mins | October 21, 2018

India is a land of several customs and traditions. Muhurats carry immense significance for Hindus , particularly when it comes to starting a new venture, buying a flat, shifting into a new flat (called Gruha Pravesh), getting married, or buying gold.  

One such muhurat is Dhanteras or Dhanatrayodash (the first day of Diwali), which is considered auspicious to buy gold.

It is believed that buying gold on Dhanteras offers good fortunes, eternal wealth, and is symbolic of Goddess Lakshmi.

And in the heart of billions of Indians, gold has always carried high emotional value, as it is passed on to generations and strengthens bonds. 

If you are purchasing gold this Dhanteras, opt for three wise ways:

1. Gold ETFs ––

   Gold ETF is an open-ended exchange traded fund (offered by mutual funds) which tracks the price of gold and each unit represents ownership of the gold asset.

   Gold ETFs can be purchased on the stock exchanges (demat and share trading account is a must). And when you buy gold ETF, you get a contract indicating your ownership in gold equivalent to the rupee amount of your investment.

   Each unit of gold in the gold ETF that you buy is equal to 1 gram of gold (some mutual fund houses also offer 1 unit at 0.5 gram of gold). However, the gold is held on your behalf by an appointed custodian for the ETF. Notably, you will not get to see or receive delivery of the gold you own; but in times of need, the units can be used as collaterals for loans.

   There are advantages of buying gold ETFs…

   • Convenience: Being traded on the stock exchange, they can be easily bought and sold at the market value. Plus, in the absence of physical delivery, they are easy to hold. You do not have to worry about the storage and security aspects that are typically associated in case of physical gold. Your gold ETF holdings are safe in your demat account until they are sold.
   • Quality: You do not have to worry about the quality of the gold that you own; because as per the Securities and Exchange Board of India (SEBI) regulations, the purity of underlying gold in gold ETFs should be 0.995 fineness and above.
   • You don’t have dole out a premium: Unlike physical gold, where you would pay for making charges additionally; gold ETFs are purchased and sold at the underlying prevailing market price of gold.
   • Low cost: Physical gold needs to be stored in a bank locker to ensure its safety. Whereas gold ETFs, since they are held in demat form, have a lower relative holding cost.
   • Resale value: Since the gold ETFs are traded at their prevailing market price, as regards the resale value, you don’t have to worry. The units can be easily sold at the prevailing market price during the trading hours of the exchange.  This saves you from the horrendous experience that you may encounter while selling physical gold, where the prospective buyer could doubt the quality of your gold (fetching you a less price) and for jewellers who will deduct making charges thereto.
2. Gold Saving Funds –

   These also known as gold funds, are fund of fund schemes (offered by mutual funds) which invest their corpus into an underlying Gold ETF which benchmark their performance against the physical prices of gold. Hence by doing so, they attempt to provide returns that closely correspond to the returns of its underlying Gold ETFs.

           Unlike gold ETFs, to purchase gold saving funds a demat account is not necessary; the units allotted reflect in the mutual fund account statement.

           However, do note that the expense ratio compared to a gold ETFs, is slightly high, but over the long-term the returns can prove rewarding.  

   You can invest in gold funds lump sum, through SIPs or whichever way is convenient for you. But do note that SIPs facilitate regular and disciplined investing and over time can compound wealth with the benefit of rupee-cost averaging.

   In addition, like gold ETFs, investing in gold saving funds is a smart option with merits ––– it is convenient, low holding cost, quality is not an issue, no premiums to be paid on the purchase, and no compromise on resale value.

3. Sovereign Gold Bonds (SGBs) –

   SGBs are government securities denominated in grams of gold (1 gram and in multiples thereof) and come with tenure of eight years.

SGBs are issued by the Reserve Bank of India (RBI) on behalf of the government at the issue price. The bonds are issued in denominations of 1 gram of gold and in multiples thereof and are tradable on the exchange. 

SGBs are held in the books of the RBI or in demat form eliminating the risk of loss of scrip. How your investment would fare, is based on the movement of gold.

The minimum investment allowed is 1 gram, while the maximum buying limit is a subscription of 4 kg for individuals, 4 kg for Hindu Undivided Family (HUF) and 20 kg for trusts and similar entities notified by the government from time to time per fiscal year (April – March).

During the holding period, you earn interest @2.50% p.a. (fixed rate) on the initial amount in SGBs. The interest will be credited semi-annually to your bank account and the last interest will be payable on maturity along with the principal.

On maturity, SBGs are redeemed in Indian rupees and the redemption price is based on simple average of the closing price of gold (of 99.9% purity) of the last three business days from the date of repayment published by the India Bullion and Jewellers Association Limited.

Premature redemption/encashment is allowed after the fifth year from the date of issue on coupon payment dates. You can approach the concerned bank/Post Office/agent 30 days before the coupon payment date. And please note that a request for premature redemption can only be entertained if you, the investor, approach the concerned bank/post office at least 1 day prior to the coupon payment date. The proceeds will be credited to your bank account provided at the time of applying for the bond. As per the current tax laws, the capital gains tax arising on redemption of SGBs to an individual is exempted. 

You also have the option to gift these bonds to your near and dear ones by following legit procedures.

Notwithstanding the above, if you have a wedding coming up in the family or an ardent believer of investing in physical gold, you may consider buying gold bars, coins, and/or jewellery.

But make sure that the gold you buy is hallmarked by the Bureau of Indian Standards (BIS). Insist on the on a hallmark certificate to authenticate the purity of gold you purchase. It will have reference of the year of hallmarking, stamp of BIS, carat (24k or 23k or 22k or 18k and so on), and jeweller identification mark.

Whatever be your choice of investing, here are some of the benefits of investing in gold:

• Commands liquidity;
• Can be looked at as a lender of last resort
• Perceived as a safe haven; a storehouse of value during uncertain times
• Can act as a hedge against inflation over the long-term; and
• It is an effective portfolio diversifier

Currently, the following factors make a case for investing in gold:

• Rising international crude oil prices
• Upside risk to retail inflation
• Weak Indian rupee
• Turbulence in the equity market
• Intensification of trade wars
• Geopolitical tensions
• Longer Brexit transition 
• Economic uncertainty in many parts of the world

Hence, gold is expected to display its lustre.

So, go ahead and buy gold this Dhanteras. Holding at least 10-15% of your entire portfolio in gold with a long-term investment horizon is a prudent strategy.

Happy investing! And Wish You a Very Happy Diwali!

Happy Banking!

Disclaimer: This article has been authored by PersonalFN, a Mumbai based Financial Planning and Mutual Fund research firm known for offering unbiased and honest opinion on investing. Axis bank doesn't influence any views of the author in any way. Axis Bank & PersonalFN shall not be responsible for any direct / indirect loss or liability incurred by the reader for taking any financial decisions based on the contents and information. Please consult your financial advisor before making any financial decision.