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Saturday, August 20, 2011

Avenues to invest in demat form of gold

Uncertainty in the global markets, slow recovery of developed nations, volatility in the stock market and sub-optimal economic policies across the countries has forced people to find safer havens for investment. This is where gold scores over other options. Not only people, nations are also reposing their faith in gold.

Gold has been making waves ever since S&P downgraded credit rating of USA from AAA to AA+. It crossed the 26,000 mark in three trading sessions. We are not going to predict the price of gold here, but we will provide some avenues for investing in gold for people who do not want to own physical gold. Gold can be bought by many other ways. Some of these ways include:

Gold ETF

Gold ETFs are exchange-traded funds which are equivalent to mutual fund units. Each unit is equivalent to 1 gm of gold, but some fund houses have 0.5 gm of gold as one unit. The price is almost half per unit for these fund houses’ gold ETFs. Gold ETF can be bought and sold just like mutual funds using your regular demat account. The NAV is displayed periodically for gold ETF just like mutual funds. The gold behind the ETF has a quality of 99.9%. This means you do not have to worry about the quality aspect. Buying gold from outside is fraught with risk as you have to rely on the goodwill of the seller.

The advantage of gold ETF is that you do not need to worry about the safety and storage. This is also liquid when compared with physical gold. The other advantage is that you do not need a lot of money to invest in a gold ETF. It is also more tax efficient compared with physical gold. You need to keep physical gold for three years to claim long term benefit s while the tenure is just one year in case of gold ETFs.


National Spot Exchange (NSEL) allows investors to buy gold, silver and copper in electronic form, also known as e-Gold, e-Silver, and e-Copper. This facility allows investors to buy gold in a dematerialised form. The trading session is from 10 am to 11:30 pm, and hence, investors can trade at their convenience. Investors can buy in the lot in 1 unit of e-Gold which is equivalent to 1 gm of gold. The purity is 995.

You have to open a separate demat account from a list of depositories. The list of depositories can be taken from the NSEL website.

Investors may choose to sell the e-Gold any time and get cash or take delivery in physical form from a NSEL designated centre. At present, dematerialisation centres are there in Mumbai, Delhi, and Ahmedabad and will soon be opened in major cities across India.

Gold funds

Gold funds are just like mutual funds run by a fund house. The advantage of a gold fund is that investors do not need a demat account to invest. The NAV of the fund will be benchmarked against the price of gold. Since there is low penetration of demat account in India, gold fund is a good option. This gives you all the benefit of virtual gold such as no storage cost and safety concern. However, keep it mind costs and advantages before you decide which is best way to invest for your needs.

There is another option called gold fund-of-funds (FoF). These funds invest in various gold ETFs. The NAV is determined by the weighted average of the NAV values of various ETF that the fund of funds consists of.

While the world is bullish on gold, you have to consider your own situation before you invest in gold. Remember that the returns from gold don’t come by dividends and bonuses, but purely by price appreciation. Price appreciation is a function of market sentiments in the case of gold as there is no fundamental income projection in future unlike that of a company. Treat gold as a great way to store value.

Source: Financial Express


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