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Best Investment Option Amongst Different Ways (ETFs,Banks,Jewellers) of Buying Gold in India

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India is one of the largest consumers of Gold in the world with a strong cultural and religious affinity for this “barbaric relic”.Giving of gold jewelery during marriage is sort of compulsory and is even bought as an investment.The high prices of gold has failed to dampen the enthusiasm for gold amongst India’s increasingly wealthy classes.While Silver is also bought during some auspicious days such as “Dhanteras”,Gold rules the roost as far as precious metals are concerned.Traditionally Gold has been bought from jewelers in the form of jewelery by Indians,however sophistication of the Indian Financial Industry has increased the gold buying options for Indian investors.Here is examining some of the pros and cons of different investment options .

1) Family Jeweler -  This is the traditional way of buying gold for Indian people and still accounts for a majority of the purchases.A Trusted Jeweler is a common thing found amongst rich and middle class Indian families.Most of the jewelery and gold buying is done from this person.However the disadvantages of this form of gold buying are many.The purity of the gold is always a question and the margin charged is generally much higher.Also the bid-ask spread is more than an ETF  since you would get a much lower selling price for your gold.However this continues to be the dominant form of gold buying in India despite the potential risk of cheating.

In the Q2 2009, 125.3 tonnes was used for jewelery making while 38.9 tonnes was used for investment purposes. However, in Q2 2010, 123 tonnes was used for jewelery making while 41.5 tonnes went towards investments indicating a 2% fall in consumption in the jewelery sector and a 7% rise in investments in gold.

2) Gold ETFs - Gold Exchange Traded Funds (ETFs) have become quite popular in the last couple of years with a number of asset management firms in India launching this ETFs.In fact Gold ETFs are the most popular asset ETFs in India currently.The asset size of these ETFs has increased sharply with the increasing popularity of gold as an investment asset.Here is a listing of the Gold ETFs found in India  currently.

Gold ETFs had about Rs 32 crore as AUM as on March 31, 2008, which grew to Rs 736 crore by March 31, 2009. However, by March 31, 2010, the amount has nearly doubled to Rs 1,590 crore. Latest Association of Mutual Funds in India data shows AUM for Gold ETFs as on August 31, 2010, at Rs 2,639 crore.

Advantages of Gold ETF

  1. Purchases can be made in small denominations: An investor can purchase gold ETFs in small denominations. For example, one gold ETF unit represents one gram of gold. Therefore, an investor can even buy small amount of units at a time and then accumulate more units over time to shore up his investment.
  2. No worries about quality: When buying a gold bar or gold coin, a buyer has to make sure he buys it from a trustworthy source, lest he gets saddled with gold of lesser purity. There have been instances when one has paid for a 24K/10 gram gold coin and has got a 19-20K/10 gram coin. This cannot happen in the case of a Gold ETF as an investor does not need to take physical delivery of the gold.
  3. Convenient resale: Since Gold ETFs are traded on the exchange, an investor can buy or sell units easily anytime during market hours. Try comparing this with the headache of selling a gold bar, coin or jewelery. An investor always tends to lose some amount towards making charges in case of jewelery and banks do not buy back gold coins, even when purchased from them.
  4. Hassle-free storage: In case of Gold ETFs, there is no hassle of storage as it is in demat form. In case of gold bars, coins or jewelry, one may have to hire a bank locker, which again comes at a considerable cost.
  5. Taxation: Physical gold needs to be held for three years or more to be eligible for long-term capital gains. If physical gold is sold before the stipulated period of three years then short-term capital gains tax will be applicable. Comparatively, if Gold ETFs are held for less than a year, then the gains fall under short term capital gains. This means, that gains are clubbed with the overall income of the investor and depending on the tax slab he falls in, taxes will be applicable. Further, if the Gold ETF units are held for over 12 months; then the gains are classified as long term capital gains tax, where the investor will pay either 10% on the gain (profit) without indexation or 20% with indexation, whichever is lower.

Different Gold ETFs available in India

1. Benchmark Gold BeES

2. UTI-Gold ETF

3. Kotak Gold ETF

4. Reliance Gold ETFs

5. Quantum Gold Fund :

6. SBI Gold ETFs

7. Religare Gold ETF

8. HDFC Gold ETFs

9. ICICI Prudential Gold ETF

Note the Benchmark Gold ETF Gold BeEs is the best ETF option amongst the ETFs available in India due to its very low expense ratio of 1% compared to the 2.5% charged by most of the other ETFs.Note Benchmark is the best asset management company in terms of the variety and expense of ETFs.I would recommend Gold BeEs is the preferred investment vehicle of choice for buying Gold in India.

3) Buying Gold Coins and Bars from Banks,Reputed Jewelers etc - Nowadays Banks and Reputed Jewelers like Tanishq are also selling Gold Coins and Bars with branding and assurance of purity.However the margins by these sellers are too big and much more than charged by ETFs or traditional jewelers.Note the margin is as high as 10% for these banks just for quality assurance.I don’t recommend buying gold from banks . .Note there have been complaints regarding banks refusing to buyback their own issued gold coins citing filmsy reasons.Knowing the banks in India,I don’t doubt the story.Here are some pros and cons of buying gold from banks in India.

Expensive, for sure

Bank
(Private)
Branded
Retailer
Jeweller
Purity0.999 0.9990.999
Price per kilo* (Rs)1,071,520 1,025,000 940,000
% Discount to Pvt Bank RateNM4.5%14.0%

Do not make a judgment as yet. The banks, as their relationship manager will definitely pitch (only if you ask though), give you a certificate assuring you of the purity of the gold. And that’s why they charge a premium for the gold. So, on the one hand you get pure gold with a “certificate” and on the other you get just pure gold.

To be able to make a rational decision, let’s ascertain the value of the certificate i.e. what benefit it offers you. In case of standard gold bought for the purpose of investment, the benefit which one looks for is whether the seller will buy the gold back or not and, if yes, at what price will he buy it back?

Banks lose out

Gold BarBank
(Private)
Branded
Retailer
Jeweller
Buy back facilityNoYesYes
Discount on buy backNANILNIL

Here’s an eye opener for you. The bank, which pushed you into buying standard gold at a premium, will not buy the gold back from you! So, if you bought gold from a bank today for Rs 100, and you needed to sell it the same day (to a jeweller as the bank will not buy the gold back from you), all your will realise is Rs 86! Of course, you get to keep the certificate!

The jeweller on the other hand, will buy back gold from you any day at the prevailing price. Some jewellers also give you a certificate for the gold you buy, thus diluting a key selling point of the bank.

List of Major Indian Banks and Retailers Selling Physical Gold

  1. HDFC Bank
  2. ICICI Bank
  3. State Bank of India
  4. Bank of Baroda
  5. Indian Bank
  6. Bank of India
  7. Punjab National Bank
  8. Reliance Money through Indian Post Office
  9. Tanisqh Jewelers

Summary

The best way to buy gold in India is through Gold BeEs ETF for low expenses and liquidity.However if you want to buy physical gold then your trusted family jeweler may the best choice as Banks and Reputed Retailers of Gold charge an exorbitant 8-10% transaction cost one way on gold.Can’t understand why the Banks have to fleece the customers in case of selling Gold.But knowing Indian Banks who love Regulation in fear of competition amongst each other it does not come as a big surprise.

PG

Sneha Shah

I am Sneha, the Editor-in-chief for the Blog. We would be glad to receive suggestions, inputs & comments on GWI from you guys to keep it going! You can contact me for consultancy/trade inquires by writing an email to greensneha@yahoo.in or call me on +913340606492.

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5 Responses so far | Have Your Say!

  1. mateshwari

    very informative article

  2. Sandeep

    What about Gold Futures (MCX) you did not include this in you article

  3. K V Subba Rao

    The Article is very comprehensive in the sense it covers all aspects any Investor normally looks for

    I found several websites dealing with the subject either remaining silent or quoting rule position about capital gains tax incorrectly. In this Article, tax rule position stated is correct

    Another distinguishing feature is you have given a bold recommendation with reason for preferring Benchmark Gold ETF amongst the group

    I now write to request you the following:

    1.0 Suggest three-four good websites which have proven record of forecasting gold price movements

    2.0 Being a senior citizen, I am not bold enough to invest my savings in Share Market.

    2.1 Investments in risk-free Fixed Deposits yield not more than 10 %.

    2.3 Gold price has risen by 108.82 % over last five years as per goldprice.org. Annual (cumulative) growth rate works out to 15 % plus. which is far higher than Interest on Fixed Deposits.

    2.4 So I am considering one proposal of investing about 50 % of saving amount in Goldex (trade name in nse and bse for Goldbees). I need monthly regular income, after leaving the present job on contract basis. At that time, I shall sell four to five units every month to supplement other sources of income.

    2.5 We may find that at times gold prices fall but such period is short lived. We only need to have patience to refrain from selling in that period. Prices will again go up and surely “make up” the loss during the period when gold price falls

    2.5 To put it briefly, I propose to “shift” money from Fixed Deposits to Goldex because (a) over a pretty period of five years, rate of growth is higher than interest on fixed deposits; (b) there is facility to sell units on-line whenever we want.

    I solicit your Suggestions and Comments on the above

  4. Abhishek Shah

    Mr Subba,
    Thank you for your comments. Regarding your questions

    1) I don’t think anyone can predict the price of gold correctly.Websites are not of much use either.I can suggest you some good articles and you can form your own opinions.Gold is a very difficult thing to value and people have radically different opinions on gold

    http://mises.org/daily/2660

    Pros of Gold

    http://www.marketfolly.com/2009/11/john-paulsons-gold-fund-betting-against.html
    http://www.carsamba.net/eskisi/images/redstar/misc/mgc_chatbox/samc/john%20paulson%20gold%20fund%20presentation.html
    http://www.sprott.com/main3.aspx?id=55

    Cons of Gold

    http://blogs.ft.com/maverecon/2009/11/gold-a-six-thousand-year-old-bubble/

    2) I think your asset allocation should include all 3 – equity,debt (fixed deposits) and gold.You can also think of investing in MIPs which have small exposure to equity (10-30%) I think and give monthly income
    2.1) Past performance is not a good yardstick to predict future growth.I am not sure whether gold can give you such returns in the future.I think 50% may be too high a figure

    I am not a financial adviser so please take my opinion as general comments only and don’t form your decisions based on this.As always please do your own research and follow that.I think owning some portion in gold is a good idea given the monetary debasing by Bernanke.I personally put around 5-10% in gold in well.But remember gold does not give you a cash flow like a FD,or stocks so depending on capital gains of gold for your retirement may not be the best idea.Please feel free to discuss further

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