Investors should stick to gold-linked instruments for transparent pricing

When you invest in a gold-linked instrument, check if it is backed by physical gold.
Until a few years ago, 35-year-old Jamshedpur-based dentist Neelam Jain was your typical gold buyer. Her preferred mode of investing in the yellow metal was to purchase jewellery and gold coins. In recent months, however, she has shifted to gold-linked financial products, such as sovereign gold bonds (SGBs). “One does not worry about safekeeping or quality, as one does when buying physical gold,” she says.  

According to recent estimates by the World Gold Council (WGC), Indians hold about 24,000-25,000 tonnes of gold, which makes it a crucial asset class that most investors need to manage prudently.

Physical or financial gold? If you are looking at gold as an investment option, buy it in the form of a financial instrument. Prices tend to be more transparent here. “Even when the end-goal is to convert it into jewellery, say, for a child’s marriage, you are better off investing in a gold-linked financial instrument, which can be converted to gold or cash closer to the goal,” says Vishal Dhawan, chief financial planner. Adds Kishore Narne, associate director and head of commodities, Motilal Oswal Financial Services: “Only if you want to wear the gold should you buy it as jewellery.”

Gold tends to do well when the equity markets are facing turbulence and hence stabilises portfolios. It also serves as a hedge against the risk of the rupee depreciating against hard currencies like the dollar. According to Dhawan, aggressive investors may not hold any gold at all in their portfolio, and may opt for international funds instead to guard against currency risk. Gold may constitute 10-15 per cent of conservative investors’ portfolios.


Ensure it is backed by physical gold: When you invest in a gold-linked instrument, check if it is backed by physical gold. Exchange traded funds (ETFs) and digital gold are backed by the metal in physical form. SGBs are not backed by gold reserves, but they are at least backed by the government. Trouble could arise in gold accumulation plans of jewellers. “All you have there is a promise. If the jeweller goes bankrupt, there is no gold lying in a custodian’s vault to be returned to you. You will have to stand in a queue along with other lenders,” warns Somasundaram PR, managing director, India, World Gold Council.

Next, let us look at some of the physical forms of gold and gold-linked financial instruments.

Coins: Coins usually sell at a mark-up of 6-7 per cent above the price of gold. The majority of coins sold are neither branded nor hallmarked. A few bank branches sell them. Otherwise they are mostly sold by jewellers, who sometimes put their own brand names, or more commonly, images of Lakshmi, Saraswati, etc. If the coin comes from a refiner, it will be hallmarked. “Go for a coin from a branded refinery, such as MMTC-PAMP, which is LBMA (London Bullion Merchant Association)-certified,” says Narne.

Coins from jewellers are not hallmarked. For assurance about quality, buy from a branded jeweller with a buyback policy. 

“If the coin is not from a reputed jeweller, and at the time of selling you are forced to go to a different jeweller, you may get a lower price,” says Narne.

Jewellery: The making charges for jewellery usually range from 10-15 per cent. It could be lower, 3-5 per cent, in case of a simple chain, and higher-up to 30 per cent-in case of handcrafted jewellery. “People tend to lose 20-25 per cent of the value on an average when they exchange their jewellery,” says Narne. Ask for the hallmark certificate at the time of purchase. 
Sometimes even hallmark certificates get faked. Enquire which centre the jewellery was hallmarked at, and then check if that centre is listed on the Bureau of Indian Standard’s web site. Finally, check whether the jeweller has a hallmarking licence.

Sovereign gold bonds: They are government-backed instruments. They are popular as they pay an interest rate of 2.5 per cent annually. They pay investors the existing price of gold at maturity. While SGBs have a tenure of eight years, one can exit from the fifth year. Only investors willing to lock in their money for five years should opt for them.

Digital gold: This is the latest gold-linked product. Units issued to customers are backed by gold kept in safe custody by a separate entity—the custodian. Prices are transparent. You can buy them online and via apps from players like Paytm, PhonePe, Motilal Oswal, Augmont, etc. “You can invest according to the amount of money available to you,” says Ajay Kedia, director, Kedia Commodity. The minimum amount can be as low as one rupee. Adds Sachin Kothari, director, Augmont: “Keep purchasing small amounts. Once you have accumulated enough, you can request for delivery of physical gold at your doorstep.” You can also transfer units to a few jewellers and get them converted into jewellery.

Avoid smaller, lesser-known entities that may enter this space.

Gold ETFs and funds: ETFs are easy to enter and exit as they trade on the exchanges. They are more liquid than SGBs. “But you need a broking and demat account to invest in them. You also have to pay an annual expense ratio of around 1 per cent, which affects returns,” says Kedia. Investors without demat account may opt for a fund-of-fund. 

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