If there one asset class that has captured the imagination of Indian people over the last hundreds of years it is gold. Families have bequeathed gold over generations on the belief that it is the only asset that does not lose value due to its unique indestructible nature. It is estimated that all the gold that has been mined in history is still floating around in some form and that is what makes gold unique. It is estimated that Indian households own close to 24,000 tonnes of gold which has a market value of nearly $1.12 trillion. Now that is a huge stash! And most of this gold is in held in physical form..
What are the challenges of holding gold in physical form?
While most households prefer to hold gold in physical form due to privacy and sentimental reasons, there are some serious challenges in holding gold in physical form. Here are a few of them..
Most households prefer to hold gold at home and that carries a huge risk. Alternatively, gold is also held in lockers but that has storage cost which adds up to quite a bit over the years. Also the carrying of gold to and from the bank entails risk.
The second risk in gold is the loss in making. When you hold gold in jewellery form, each time you convert the gold into bars or back to jewellery there is a loss you incur both in terms of loss of gold and monetary costs in terms of making charges. These add to your gold holding cost.
The government has now set strict limits on the holding of physical gold. Any family found to be holding gold beyond these limits and incur penal action from the government and also further inquiries from the tax authorities.
Is there a way to hold gold in non-physical form?
In fact, there are a variety of ways to hold in non-physical form. In all these methods, there is participation in the movement of gold prices. At the same time, since gold is held in non-physical form there is no threat of the gold being stolen or even loss of gold in processing. Here are four ways you can hold gold profitably in non-physical form..
Holding in Gold ETFs..
An exchange traded fund is listed and traded on the stock exchanges like any normal stock. You can buy and sell these gold ETFs through your normal trading account and hold these ETFs in your demat account. An ETF is normally like a mutual fund with the only difference being that it is closed ended and each purchase has to be backed by a sale. There is no fresh issue of gold like in case of mutual funds. Gold ETFs are perfectly safe because they are backed by actual physical gold which is kept with a gold custodian bank.
Gold Futures on the Commodity Exchange..
If you have a trading account with a commodity account also activated then you can buy gold futures in your commodity account. MCX is the exchange that sees the largest volumes on gold futures. Futures, as we all know, are leveraged products. You essentially play a small margin and then take a position betting on the direction of the commodity price. While here also you benefit from gold price movement, there are two risks. Firstly, gold futures are leveraged positions. That means just as returns will be magnified, losses will also be magnified. Secondly, gold futures being leveraged products will call for additional margins, MTM margins etc. All these can make your life quite complicated if you are looking to invest in non-physical gold and forget about it!
RBI Gold denominated bonds..
This has been launched by the RBI about two years back and is becoming a popular mode of investments. The RBI Gold bonds are fully guaranteed by the government of India and backed by gold. At the end of the tenure, these gold bonds can be redeemed with the issuer. Typically, these gold bonds also get listed on the exchanges after 6 months of their issue. Regular tranches are issued by the RBI at intervals of 5-6 months. These gold bonds can be held in the form of gold certificates and also in your demat account. The biggest selling point of these gold bonds is that they also pay interest at the rate of 2.5%, which is an additional benefit apart from the gold price participation. It is also tax-efficient.
Gold Accumulation Plan by MMTC-PAMP..
This is a recently launched product that can buy gold in fractions of as low as 0.10 grams. It is a great product to those who are looking to accumulate gold in a systematic manner. All the gold units that are issue will be standard 24-carat gold with 999.9 purity. This gold is held in non-physical form and can be redeemed either in cash or in actual gold bars. All the gold that is issued is actually backed by physical gold that is stored in separate vaults by MMTC and insured at its cost. The beauty of this method of buying gold is that you can buy fractional gold and even through your Paytm account. It is that simple.
Of course, physical gold will continue to be in demand for obvious reasons. However, for the discerning investor, non-physical gold is emerging as a viable alternative. If you can embrace demat in equities and debt, then why not in Gold?