Different ways to invest in gold

From the charts we can see that the price of Gold always increased with the exception in 2000. All the other years price of gold increased year after year. What makes this increase?. Every sections of the world started thinking about investment in Gold. Government , Fii's, Mutual funds, Private equity players and the last but not least retail investors. Once a time gold used to be the currency among countries. That practice had been stopped now. Now it is another mode of safe investment to get freed from Inflation, risk, fluctuation in the price of the investment portfolio.

What are the investment options in Gold

In this hub I am going to figure out various forms of investment in Gold for retail investors. Each method has its own advantages and disadvantages. Before going into the details let me explain various measurements or units used in relation to Gold.

Carat- It denotes purity of the Gold. or Gold per 24 24 carat = 99.99% or 1000 fine(parts of gold per 1000)

22 carat = 91.6% or 916 fine

21 carat = 87.50% or 875 fine

10 carat = 41.60% or 416 fine

2. Troy ounce - one Troy ounce is equal to 31.1034768gm

3. One Troy ounce = 120 carat

The investment options used by many with relation to gold are as follows. You can select the right investment option in gold comparing the pros and cons of investing in Gold. Investment in gold has given an average return of 27% for the last 3 years. But you can't expect that sort of return every year. If you are expecting that sort of return, then Investment in Gold is not your option. You can go for investment in equity or mutual funds. There is no need for you to take a demat account for investment in Gold. No annual charges. Without the exception for some avenues of investment there is no need for you to give away annual charges. No need to monitor it regularly. Investment in Gold is meant to diversify your investment from fluctuations, erractic returns, and the more safety. It should be limited to less than 20% of your total investment.

1. As Jewelery

You can buy Gold as Jewelery ornaments. You have to shell out 10% to 15% of the price of the Gold as fee for designing the jewelery. When you want to liquidate the jewelery you may have to forgo the fees that you paid at the time of purchase. Advantage of jewelery is its easy liquidity. You can sell it to the shop from where you purchase it. You can pledge the ornaments to bank, financier, or financial institutions at a nominal interest. You can take it back as when you have the money. You have to give taxes applicable at your locations while buying jewelery ornaments. More design in the jewelery means, less the value you get at the redemption at jewelery shop. So when you buy Gold as investment point of view, you have to select the ornaments with less design. More the design, more the deductions you get at the time of redemption. Disadvantage of this investment is threat of it being forged. Nowadays there are lockers offered by various bankers where you can park your returns. You have to shell out nominal amount as locker charges. For taxation purposes of jewelary, if sold within 3years,short tem capital gain tax and more than 3years, long term capital gains tax arises.

2. As Gold coin, Bar

You can buy Gold as coins or Bars. You will get 24 carat Gold through this means. Bars are available for investment in 1gm, 2gm, 5gm, 8gm, 10gm, 20gm, 50gm, 100gm. Other denominations are also available depending upon the financial institutions through which you are buying the gold. Advantage of this scheme is that you gets 24 carat Gold. Its purity is guaranteed. Costs are relatively less in the purchase of Gold coins or Bars. Usually it comes around 1% of the to total amount. Disadvantage of this coins are its lack of liquidity. Normally the financial institutions through which you bought Gold coins may not take it back when you want to liquidate the coins. You have to approach a jewelery shop for liquidating the Gold coin. There you have to forgo their commissions. They wont give you the market rate. You will be give 5% to 15 % reductions in the market rate. You are not going to get a loan by pledging the gold coin either. No banks are currently willing to accept Gold coin as a security for giving you the loan. Taxes applicable is 1) Short term- within 3years, 2) long term - after 3 years

3. Exchange traded funds.

This is another type of investment in Gold. Through financial agencies you buy Gold or Gold related products. Returns will match that of Physical Gold. The agency will buy Gold or shares of Gold mining countries. These financial agencies maintain a specific ratio between Gold and equity of Gold mining company or Gold only. No need to store the Gold. It is the most safe and suitable mode of investment in Gold. You have to take a demat account or a online trading account. We can also demat our holdings. Advantage of Gold ETF are that , its liquidity and less operating or recurring expenses. You can liquidate your holding any time you want, through a stock exchanges. Usually you need a demat account for investment in Gold through this means. Purity of the gold is assured in this type of investment in Gold. There are Gold only ETFs and Gold and Gold plus equity of Gold mining companies ETFs. You can select the funds considering your risk appetite. It is one of the safest ways to invest in the Gold for long term. Investments in Gold ETF are also eligible for tax treatment like Debt mutual fund which are subject to tax treatment for long term capital gain tax after one year.

4. Futures Markets.

One can Buy Gold from Futures market. You have to enter a contract via an exchange like stock exchanges, commodity exchanges etc. Here you can enter into a contract to buy or sell the Gold futures. No physical storage of gold arises in this case. You can also take the delivery of gold after the expiry of the contract if you really wanted to do so. When you invest in Gold through Futures market, there is no need to pay all the money needed for the purchase of Gold. All you have to pay is margin money. Margin money comes to around 5 to 10% of the total cost. You can lock at the price of Gold today. If you want to buy the Gold later and the price of Gold has gone above your lock in price, then you are at gaining end. Nowadays the exchanges has drastically reduced the lot size of Gold contract. Taxes-1) Short term is within 1 year( 2) long term is after 1 year.

5. Gold fund of funds or World Gold Funds

You need a demat account for this investment option in Gold. It is another cost effective means of investing in Gold. Normally the charges for this type of investment in Gold varies from 0.5% to 1.5%. You can invest very low amount through this route. No need to do thousands of money to start with. You can also do a Systematic investment plan for this type of investment in Gold. When you want to redeem the units of Gold you may be getting 1% to 2% less the market price. Here also small percentage will be eaten by the commissions and charges. Since it is an exchange traded fund you can liquidate it thorugh that means. You have to hold it for minimum of 5years to make maximum from this type of investment in Gold.

6. E- Gold

E Gold is available in as minimum as 1gm. You have to possess a demat account to buy Gold through electronic means. On purchase of units of Gold electronically it will debited into your demat account. Underlying gold unit is stored in the Exchange vault. You can sell the gold even late at 11pm. Normal charges for buying E gold is around 1% to 2% of the value of the gold you are buying. Advantages of this type of investment is its ease of transaction, less operating expenses, safety in storage. You can sell the E gold at any time you want through exchanges. Nowadays we can convert the E gold into jewelery. We can sell the E gold to jeweler and buy the jewelery of our choice. This facility is available in select countries.

7. Equity

It is a high risk strategy. Not for investors who are risk averse. In this type of investment in Gold an investor buys the shares of gold mining companies or gold refining companies. When the price of Gold increases, the value of the share of Gold mining companies also increases. Here the value of Gold mining companies also related to the market conditions, liquidity, speculation etc.. Some times the price of the company equity may become more not in relation to the price of Gold. Some time value of the equity may not be representing actual price of the Gold.

8. GOLD BULLION

Gold bullion are suitable for investors with lot of cash in their kitty. It is traded in the commodity exchanges. You can buy Gold through this route from brokers or commodity players. Cost involved in buying is less. But you have to fork out more money in storing and doing assay which determines its purity. You can keep the Gold either with you or with the brokers. Taxes- 1) Within 3 year short term, 2) after 3 year it is long term capital gains tax.

9. Gold Savings Fund

An interesting way of buying Gold is developing in India nowadays. It is thorugh Gold savings funds. They resemble Gold fund of funds, but there are some drastic differences between them. Gold savings fund usually invest the money in Gold etfs of the parent company and small percentage in fixed deposits and other money market instruments. where as Gold fund of funds invest in physical gold and equity and other instruments. Major merit of this type of investments is the non requirement of Demat account for the investors. In other words, unlike Gold etf, you don't need a demat account for buying the units of Gold savings fund.

If an investor want to buy the units of the fund, just go to the branches of asset management company and buy and sell the units. Another merit is the presence of SIP or EMI options in the scheme. You can remit SIP as low as Rs.100. For those sections of the population which are still outside the Demat network can buy Gold through this route. Main demerit of Gold Savings fund is the high expense ratio. It is more expensive than Gold etf. At present three mutual funds are offering this type of funds. SBI, Kotak and Reliance mutual fund. These funds mirror the performance of the parent Gold etf. Expense ratio is high when compared to Gold etf. For those who have demat account, gold etf is a better option. For those who don't have Demat account, Gold Savings fund can be a better a option.

Risks to the Price of the Gold

1. Since gold is an dollar denominated asset, any adverse price reaction to dollar can cause sudden reversal in the price of Gold. When the US Dollar decreases in value, the price of Gold increases. Conversely when the price of the Dollar increases, the value of Gold decreases dramatically. When the value of Gold decreases, it can buy less Gold therby by decrease in the demand for Gold.

2. Almost all the countries park a part of their reserve in Gold. Due to any major internal or external factors, any country say like America, Japan, China, or India started selling Gold then the price of the Gold collapse. With the sudden rush, price erosion for Gold can happen.

3. Demand-Supply ratio. Till date demand for Gold increases slowly but steadily. But the increase in supply is not commensurate with the increase in demand. From exploration to end product for Gold takes many years. If there is possibility of more reserves in the earth being discovered any time which may outstrip demand, the price of Gold may come down.

4. India being one of the largest consumer of Gold jewelery, any cultural variation among Indians can drastically affect the price of Gold. If Indians started thinking about Silver or Platinum Jewelery and its demand outstrips that of Gold, then the price can come down. If any Government enforces a bill restricting the amount of gold that a person can hold and strongly enforces law, then there will drastic come down in the price of the Gold.

5. Volatility in price of Gold. When there is drastic volatility in the price of Gold then the safe and less volatile nature of Gold decrease gradually. Then the risk averse investors may drop Gold from their portfolio.

Considering all these factors One can safely assume the importance of Gold in their Portfolio. But ideally the one should allot less than 20% of their savings into Gold. It gives a stabilising factor for your investment portfolio. Don't expect more than 5% return on your Gold portfolio. Any thing more than that is really a bonus. Always think rationally. When the price reach abnormal rates think about it rationally. After all Gold is a metal.

Gold is the most sought after metal in the Gold. It is the most malleable and ductile metal along with a shiny colour makes it the most sought after metal. It is almost inert. It won't react to air or humidity. It makes it to really last long. It is present with the humans from 4 th millennium BC onwards. This history along with the chemical properities and stability in prices makes it one of the safest mode of investment. The volatility in the price of gold is less. It is less volatile than equities, bonds, mutual funds, real estate, other commodities like crude, rubber, zinc, manganeese, iron. Liquidity is also high in case of Gold. It is like a currency adopted by many countries. Almost all the world countries whether large or small, keeps certain percentage of their reserves in Gold. Recently investment by retail investors in gold is also increasing. They want their investment to beat inflation. When the equity or commodity market is going downwards the value of Gold also increases. In times of uncertainties investment in gold also increases.