Most Indians like to invest in gold. As you may be aware, you have three means of buying the yellow metal — in physical form, as ETFs and futures.

Let's look at how you should invest in gold: that is, when you should choose physical gold and when you should buy financial gold (gold ETFs or futures).

Physical versus financial Your investment in gold should be based on three factors — the purpose for which you are buying, the time horizon and storage. First, are you buying gold for your children’s marriage?

If yes, is your child or children’s marriage likely to happen in the next year? If so, buy physical gold. Why? We see no great advantage in first buying financial gold, then selling the same at market rate in a short space of time and using the sale proceeds to buy jewellery.

It is more practical to give yourself at least a year to prepare yourself for your son’s or daughter’s wedding. That is, it takes a year to collect gold articles that you want to give your son or daughter when they get married.

Second, if you are buying gold for your son’s or daughter’s wedding, which is likely to happen in the distant future (more than one year), you should buy gold ETFs. These are open-end funds listed on the stock exchanges; you can buy ETFs through a brokerage firm.

The advantage is that gold ETFs are very liquid — you can sell the units at close to the spot rate of gold, receive the sale proceeds in three days and use them to buy jewellery at the end of your horizon.

Besides, ETFs are easier to hold than physical gold, especially if you are in for a longer holding period — you know how difficult it is to get a bank safety deposit locker! And even if you do manage to get one, you need to factor in the rent you will be paying.

Third, do you want to buy gold for trading or investment? That is, are you buying gold only to sell the yellow metal at a higher price at a later date? If so, you should buy only gold ETFs, irrespective of whether your time horizon is less than one year or more. Why?

Physical gold is illiquid and does not always fetch cash at the spot rate; in most cases, it is typical for the jewellers to insist that you buy jewellery from them for the equivalent gold.

For those of you who are willing to take higher risk, there is also gold futures contract. These are derivatives contracts that you can buy on the commodity exchanges. The advantage with gold futures is that you can easily short the contract if you hold a view that gold prices are likely to go down.

Finally, your investment portfolio should be portable if you have a transferable job — financial gold scores over physical gold in this regard.

Going indirect Gold has always been a preferred consumption and investment asset among individuals. In most cases, buying financial gold is more advantageous than buying in physical form. And then there is indirect investment in gold. In most cases, this requires buying global mutual funds that invest in shares of gold-mining companies. Buying such mutual funds is unlikely to give you the same benefit as buying physical gold or ETFs. Call it market risk or systematic risk, the point is that shares of gold-mining companies will also move because of factors unrelated to gold. Note that the current Income Tax regulations do not differentiate between owning physical and financial gold. Finally remember: buy only certified 24-carat (0.995 purity) physical gold or financial gold that is backed by certified physical gold.

(The writer is the founder of Navera Consulting. Send your queries to portfolioideas@thehindu.co.in)

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