Gold has given spectacular returns in since 2000. The price has gone up from $279 an ounce in 2000 to $1531 an ounce in 2011. The prices of gold have seen much fluctuation in last couple of years. There have been discussions on dollar weakening and countries preferring Gold reserve. There were some action on this front and China bought a big reserve of Gold. The allure of yellow metal never seems to wane. People buy Gold for various reasons and one of them is for investment purpose.
With new ways of investing, the proportion of people investing in Gold has gone up dramatically. In this article, we will look at few facets of investing in Gold.
The purpose of investing in Gold
Let's look at why investors prefer Gold. Gold prices are appreciating since long. This is the common observation which encourages people to invest in Gold. However if this is your goal, I would caution against investing in Gold. Gold prices are very quirky in nature. It may seem to go up every year but this is a recent phenomenon. Current information creates a bias in investors' mind by which they expect the same trend to continue in future. Gold should be taken as part of diversification of investment. It will surely not be as volatile as equities and real estate but expecting extra ordinary return in future also will not be right. Gold should be used as a tool for diversifying your risk. At the same time, it should be part of your portfolio at any time because it provides stability and liquidity.
If you look at historical prices, Gold did not even double in 25 years from 1975 to 2000. The returns were negative of you take 1980 to 2002 data (negative holding period returns in 22 years).
Options available for investing in Gold
Physical Gold: Physical gold is the most popular form of investment in India. Typically, this is in the form of gold jewellery. Investing in gold is also done for its future use in marriages and gifts. The reason for popularity of this form is mainly because of absence of other options in past. However, we have many other and safer options to invest in Gold. Buy from known jewellers as you can be sure of purity of it.
Gold coins and bars: In last few years, many banks have come up with Gold coins which can be bought. Buying from bank ensures purity of Gold. People can buy it without worrying about purity. The only disadvantage is that banks will not buy it back when you want to sell.
Gold ETF: Gold ETFs are exchange traded funds. The price (or net asset value or NAV) depends on the price of Gold in the market with a very small margin of error. Some of the Gold ETFs are Axis Gold ETF, HDFC Gold ETF, Kotak Gold ETF, Quantum Gold, Reliance Gold ETF and many more. You have to open a demat account to buy Gold ETF. The advantage of Gold ETF is that you do not have to worry about its theft. You do not need to buy a locker to store it. It is much more liquid than physical Gold where you have to find the buyer (which is easy but you have to spend time). In this case, you can just sell it through your demat account and by click of a mouse. Investors should find out the fee and other charges of Gold ETFs before buying.
Gold Funds: Gold funds are fund of funds which invest in a set of Gold ETFs or Gold ETFs of the same fund house. This is akin to investing in Gold ETFs indirectly. The disadvantage of investing in Gold funds is that your charges will be little extra. The advantage is that you do not have to open a demat account to buy Gold funds. You can buy it directly from fund houses through a broker or directly from it. Some of the known gold funds are AXIS Gold, HDFC Gold, and ICICI Prudential Regular Gold Savings. There are exit loads when you redeem the fund.
eGold: Investors can also buy eGold from National Spot Exchange Limited (NSEL). You can open a demat account in any of the depository participant (Angel broking for example) and buy it through this account. You can buy eGold just like you buy stocks of companies. One unit of eGold is equivalent to 1 gm. of Gold. The best part is that you can convert the eGold into physical Gold whenever you want.
How to choose which ETFs/Funds to buy
The best part of ETFs and Gold funds is that they do not vary significantly in performance. The variation will not be more than 1% at the max. Hence choosing gold funds/ETFs based solely on performance should not be the criteria. Instead, look at the liquidity of the ETFs/Funds. Liquidity indicates the ease with which you can sell or buy Gold ETFs and funds. Liquidity can be determined by the volume of trade. Look at the top 4-5 funds which constitute the major part of the volume of trade and then look at the returns within those funds. Invest in the one which fulfils both the criteria.