Investing in gold can make a lot of sense
Stock market is expected to remain rangebound as last quarter results are getting discounted in stock prices. All Headlines | Mkt Calendar | Gainers & Losers
By D Sundararajan, |
The stock market is expected to remain rangebound as last-quarter results are getting discounted in individual stock prices. The market seems to be reasonably valued, with the BSE Sensex between the levels of 16,000 and 17,000. A further upside over the next few months seems limited, in view of the palpable slowdown in economic activities as reflected in the growth rate of companies. This slowdown is compounded by the high rate of inflation. The government is taking all conceivable steps to counter it, and the Reserve Bank of India is taking the necessary monetary measures to control liquidity and bring down prices.
Still, it may be a while before the inflation rate comes down, given external factors. Crude oil is trading at a historic high of around $135 per barrel, and that is bad news for all oil importing economies, especially India. The domestic prices of petroleum products like petrol, diesel and cooking gas are nowhere near international prices, thanks to government subsidies, and any move to increase these prices even marginally will fuel inflation and greatly hamper the already slowing growth rate. With crude oil showing no signs of slowing down, it is indeed possible that our economic growth rate may slow down.
One may be tempted to reduce equity exposure and increase exposure to debt and fixed income options. Commitments to longterm debt instruments may not be a good idea, because interest rates may rise, given high inflation. Short-term debt and floating rate instruments could be considered under the fixed income portfolio allocation. There's no need to increase the debt portion in percentage terms, as yet.
Still, it may be a while before the inflation rate comes down, given external factors. Crude oil is trading at a historic high of around $135 per barrel, and that is bad news for all oil importing economies, especially India. The domestic prices of petroleum products like petrol, diesel and cooking gas are nowhere near international prices, thanks to government subsidies, and any move to increase these prices even marginally will fuel inflation and greatly hamper the already slowing growth rate. With crude oil showing no signs of slowing down, it is indeed possible that our economic growth rate may slow down.
One may be tempted to reduce equity exposure and increase exposure to debt and fixed income options. Commitments to longterm debt instruments may not be a good idea, because interest rates may rise, given high inflation. Short-term debt and floating rate instruments could be considered under the fixed income portfolio allocation. There's no need to increase the debt portion in percentage terms, as yet.
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Have you considered gold?
It is also important to look at other asset classes at a time like this, to diversify your portfolio. Commodities have been faring better than stocks over the past few months, and the precious metal, gold, is one commodity that's likely to move in tandem with international crude oil prices. Review your investment portfolio in view of the high inflation rate and the possibility of a slowdown in economic activity, and rework your asset allocation. It may be a good idea to reduce equity exposure in percentage terms by about 5-10 % of your total portfolio, and allocate that money to gold.
How to invest in gold
Buying gold in physical form-bars and coins-is an outdated option, fraught with issues including purity, liquidity, secure storage, and so on. The best option is to buy a listed exchange-traded gold fund (ETF) from the stock market. All you need is a demat account and a share trading account with a broker or sub-broker who deals in stocks. Currently, four ETFs are available: Gold BeES (Benchmark Mutual Fund), Master Gold (UTI Mutual Fund), Kotak Gold (Kotak Mutual Fund), and Reliance Gold (Reliance Mutual fund).
These are traded in units of one. That means you can buy one or more units at a time. Each unit represents approximately the market value of one gramme of gold. There is not much to choose between the four funds, because no management skills are involved. You can buy whichever is quoting a little cheaper than the others. However, the volume of units traded on any given day could help you decide, because a higher volume of trading means better liquidity: easy to buy, easy to sell, and the spread between the bid and offer (that is the selling and buying prices on the market) will be low.
Gold ETFs are traded close to real-time gold prices in the market, that is, ETF prices move up and down with the market price of gold in the conventional marketplace. Your expenses in an ETF would be very low: you would pay securities transaction tax (STT), brokerage /service tax, and the like, which are unlikely to exceed 1% of market price. You'd hold gold in demat form in your demat account, just as you hold shares. If you decide to sell your ETF units, you'd do so through your stock broker or sub-broker and the charges would be the same as what you paid while buying the ETF. Thus an ETF is very convenient, and you need not worry about the purity of the gold, secure storage, insurance against theft, and so on.
What about physical gold?
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Perhaps you're one of those parents who keep buying gold over the years, for possible use to make jewellery when your son or daughter gets married. You may be wondering how a gold ETF would help you do that. Well, it's still the best option for you because of the factors discussed above. You can buy gold ETF units now at the current price of gold, hold them in your demat account, and sell them in the future, whenever you want, and use the money to buy jewellery then. In this way, you will be protecting yourself from rising gold prices, while also sparing yourself anxiety about the purity and safety of your gold. You can keep accumulating gold at a slow rate, perhaps even one gramme at a time.Returns and taxation
Gold has appreciated substantially over the past couple of years. The growth rate of late has been much higher than the conventional rate of appreciation. But, with global uncertainties rising, gold may be a very good hedge, and can be expected to deliver returns of 10% to 15% a year, over the next few years. If you sell gold ETF units within one year, the resulting gains will be short-term capital gains, and you will be taxed at the same rate that applies to your overall income. If you sell after having held the gold ETF units for more than one year, you would make a long-term capital gain. The taxation is similar to a non-equity oriented mutual fund on which STT is charged-you can pay tax at the rate of 10% on taxable long-term capital gains, or 20% of the long-term capital gains after applying cost inflation index to your cost of purchase. You can choose the option that allows you to pay the lower tax. Surcharge, education and secondary education cess will also be applicable on the amount of tax. Putting money in a gold ETF is considered investment in a mutual fund, and not in gold, so it's free of wealth tax also.
D Sundararajan is Certified Financial Planner and Investment Consultant, Trendy Investments
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