Gold is intrinsic to Indian culture. India is the largest consumer of gold in the world. Traditionally though this metal has been viewed as an ornament rather than an investment. Gold in India is an instrument to display your prosperity rather than any other use of that metal. Indian households contain over 16000 tons of gold with net worth of 27.2 lac crores. To put this in perspective, this is twice the reserve held by the RBI.
Even today the factors that surge the sales of gold are festivals like Akshaytritiya and Onam. But this view is increasingly changing as investors now are considering gold as an investment. The current market has evolved to accommodate this change in perspective by introducing various options. Below are the three most popular options along with challenges faced when considering gold as an investment.
Gold is traded as an investment in traditional form, in Gold ETFs and Gold Mutual Funds.
Gold in traditional form:
It has been in Indian history since time began. This is direct investment in physical gold. It does not require a lot of paperwork. As an investment, this is buying gold at a rate in market. And then selling for a profit when the prices are up (rare) or when a need arises.
The challenges faced in this investment are:
Most gold is converted in the form of jewelry before bring stored. There are making charges applicable when gold is converted to jewelry. The storing of this gold also exposes it to the risk of theft or burglary. Gold investment in the form of coins from banks or bullions can also be overlooked. The banks will not buy back your coins and bullions require a large capital. When stored in traditional form, this investment will cash outflow for the maintenance of lockers.
• Gold as an investment in ETFs (Exchange Traded Funds):
These are mutual funds that invest only in gold. They are the most popular forms of investment in gold today. ETFs are cheaper, easier and safer. It has the advantage of regular income in the form of dividends being paid. It has an assurance of purity as it deals only with 99.5% pure gold.
The challenges faced in this investment are:
One cannot actually see his investment, rather accesses it electronically. This form of investment needs a Demat account. This form requires asset management and brokerage charges. This means the returns will be lesser than the actual increased value of gold. This option requires proper paperwork often detailed. This option is best suited for intraday trading. And for traders showing the effervescence and acumen for such trading.
Gold as an investment in Gold Mutual Funds:
This is an investment stocks of companies involved in gold mining. Rather than buying gold directly you involve yourself in buying stocks of companies involved in gold mining. The thought behind it being, as prices of gold rise profitability of the companies rises. This translates into a rise in the prices of stocks of the company. Is based on the notion of gold being a hedge against uncertainty of the equity market. This was proved in the Equity market crash of January 2008 in India.
The challenges faced in this investment are:
Charges are involved in management of the funds. There are entry and exit charges as well. These reduce the overall return off this investment. Proper and detailed paperwork is required. This investment is exposed to stock market fluctuations. These are for investors with a risk appetite and the stock market aficionados.
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