The Hindu Business Line : Ways to gild your portfolio

Stocks and real estate make up the lion’s share of your portfolio and you are worried about both stock and property prices melting down at the same time. If that’s your worry, gold may be an ideal addition to your portfolio, as it seldom loses value when other assets do. That, simply put, is the most compelling argument for investing in gold.

Having offered single-digit returns over the past ten years, gold cannot replace equities or real estate in your portfolio to meet your long-term growth targets. Nor does gold, with its long somnolent phases and sudden price spurts, come anywhere near debt in offering stable returns.

Gold’s merit as an investment lies simply in the fact that it tends to perform well when other markets and assets are in the throes of crisis. The recent surge in gold prices to a near 30-year high was also sparked by fears of a crisis — a weakening US economy and whether this would result in a marked depreciation of the dollar.

Having said this, global factors such the health of the US economy, the gyrations in the dollar and the actions by central banks in Japan and China have an increasing impact on stock, bond, currency and property markets worldwide, and India is no exception.

Given the difficulty of predicting these variables, investors need to hold a portion of their portfolio in a “safe haven” asset that does not move in tandem with their other investments. Gold fits the bill quite well, given its historically low correlation with most conventional investments such as stocks, bonds and currencies.

What are the options?

For Indian investors seeking to “gild” their portfolio, buying jewellery is no longer the only viable option. Here are alternative avenues to invest in gold, and the pros and cons of each option:

Gold Exchange Traded Funds: Gold ETFs are mutual funds that hold physical gold in their custody and then issue units to investors to represent the value of those gold holdings. Investors can buy or sell ETF units through the stock exchange much like shares, if they have a brokerage and a demat account.

In the Indian context, each Gold ETF unit usually represents one gram of gold. A Gold ETF allows you to hold gold in paper form and passively track returns on gold. Usually, NAV movements reflect changes in gold prices in the international market (London).

ETFs allow you to make very small purchases (starting from 1 gm) and phase them out over a period of several months/years to take advantage of price swings. They are cost-effective, given that pricing is transparent and you can buy and sell units at prices (net of brokerage) that are linked directly to international gold prices. No making or transaction charges are involved.

There is also no carrying cost as the investment is lodged in demat form. You are sure of your investment returns mimicking gold price returns in dollar terms. Liquidity is high as the units can be sold through the markets at any time of your choice. The investment is exempt from wealth tax and long-term capital gains tax (if held for one year). The disadvantage of ETFs is that, as passive investment vehicles, it is up to the investor to time buys and sells well, to take advantage of gold price movements.

Gold bars from banks: Private sector banks, prominent jewellers as well as brokerage firms vend hallmarked gold bars/coins of guaranteed purity and fineness. This is a good avenue for investors to buy and own physical gold, without the purity-related risks associated with buying jewellery.

The key disadvantages in investing in physical gold are the relatively higher costs and the carrying costs involved in storing and securing physical gold.

Most vendors charge a mark-up over the prevailing gold prices towards making charges when they vend gold in bar/coin form (the mark up may range anywhere between 7 and 15 per cent). Moreover, liquidity may be of a lower order than that offered by ETFs, as most banks/brokerages do not have facilities to buy back gold bars, once sold. Jewellers however, may offer this facility.

Overseas investments: With Indian investors now allowed to remit up to $100,000 in a year, private banks and large brokerages do enable and advise their high-net-worth clients on investments in stocks and other securities listed in overseas markets. Some of the investment options that could be available are large gold ETFs such as Streetracks Goldshares, iShares Gold Trust and other ETFs that track gold mining and precious metal stocks.

For domestic investors looking to take exposures to gold-related stocks overseas, the DSPML World Gold Fund (see accompanying interview) is also an option to consider. This open-ended mutual fund managed by DSPML Mutual Fund channels your investments into the Merrill Lynch-managed World Gold Fund, which is an international fund investing in stocks of gold mining companies.

Commodity exchanges: Investors who have a trading account for commodities can also acquire futures contracts in gold through commodity exchanges such as the NCDEX and NMCE. These exchanges usually specify minimum lot sizes (usually 1 kg), in which contracts can be acquired. The price at which you transact will be the price for the contract quoted on that day in the exchange, which is usually linked to domestic gold prices.

Those seeking to buy physical gold through this route can buy the near month contract (the contract for the closest future month) and take delivery of gold in the specified month. Costs involved in taking this route would be the margin requirements specified by the exchange, brokerage charges payable to the broker, charges payable to the warehouse towards weighing and storage of gold as well as stamp duty, sales tax or VAT payable on gold in that particular State.

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