|Dhanteras and Diwali – India’s most eagerly-awaited festivals – are around the corner, giving us the opportunity to indulge in various pleasures such as sweets, shopping, socialising, gifting, and most of all – buying gold.
The tradition of buying gold during Diwali has continued over thousands of years, and for all the right reasons. The yellow metal has delivered healthy returns over the long term. Moreover, it has provided essential financial security during trying times. This along with a timeless charm has made gold popular amongst the masses.
An endorsement by tradition is just what is needed for buyers to rush into purchasing gold. In their eagerness, buyers frequently splurge on gold jewellery by convincing themselves that they are investing rather than spending, since the value of the ornaments is likely to increase in the future. While the justification isn’t entirely incorrect, it lacks some important considerations.
Gold jewellery – a dull investment option
Buying gold jewellery should not be confused with investing in gold. While gold jewellery is bought and used for its aesthetic value, it’s ineffective as an investment option. This is because of the loss in value on resale. The making charges on gold jewellery, which typically range between 6-14 per cent of the cost of gold (and may go as high as 25 percent in case of special designs) are irrecoverable.
In this context, one may feel that gold coins and bars are better suited for investment. However, it should be noted that purchase of gold coins and bars comes at a significant premium of about 5-15 per cent over the price of gold (the lower the denomination of the coins and bars, the higher is the premium). This premium is irrecoverable on sale.
Smarter ways to invest in gold
Increasing awareness on the drawbacks of physical gold as an investment option has made people switch to gold exchange traded funds (ETFs) and sovereign gold bonds – the smarter ways of investing in gold.
Gold ETFs are mutual funds that invest in physical gold. Each unit of a gold ETF represents 1 unit (or in some cases 0.5 units) of gold. Investors in gold ETFs do not bear making charges associated with physical gold.
Moreover, gold ETFs are traded on the exchange at the prevailing market price of physical gold, which implies that investors can buy or sell their holdings at prices that are close to the market price, without worrying about paying a significant premium on purchase or selling at a discount.
Sovereign gold bonds are government-backed securities denominated in grams of gold. Investors in sovereign gold bonds are assured of the market price of gold at the time of purchase and redemption.
Gold ETFs vs. sovereign gold bonds
At the outset, gold ETFs and sovereign gold bonds may seem similar. However, there are a few differences which are highlighted below:
Make your gold purchase count this Diwali, but no jewellery please!
Reading Time: 2 minutes