In the past couple of months, gold has caught the imagination of everyone. The consistent rise in its prices has been too lucrative to ignore. In the past three years, prices have risen from Rs 8,690 (per 10g) to Rs 18,880 — a rise of 117.2 per cent. In the past three months, the rise has been 13.22 per cent.
Obviously, financial experts are enthused. “Gold can be used for three things — ensuring liquidity, hedging and taking a loan. Depending on a person’s risk profile, I would advise a person to have 15-20 per cent exposure to it,” said Hitungshu Debnath, investment advisor.
Even mutual funds (MFs) want to tap the metal’s potential. In May, Religare Mutual Fund launched a monthly income plan that invests in equity, debt and gold. Canara Robeco has launched a debt plus gold product, Canara Robeco InDiGo.
There are also companies that are aggressively offering gold loans. Mannapuram Finance, Muthoot Finance and HDFC Bank are advertising the product by pointing out that the rate of interest is much lower than in personal loans. Then, 4g and 5g gold coins are gaining prominence. And, gold funds and exchange-traded funds (ETF) have been there for the past few years.
So, given the euphoria around gold, what should you do as an investor or a loan seeker? Let’s look at these products in a little detail.
Mutual funds: A gold fund or an ETF is, by all means, a great portfolio diversifier. The returns have also been impressive. In the past month, gold ETFs have returned 4.65 per cent, slightly lower than the 5.3 per cent category average of FMCG funds. Over the past three months, it has returned around 9.8 per cent. Over one and three years, it has returned 24.4 per cent and 27.1 per cent, respectively. The latter was the best performer among all MF categories.
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The two gold mining funds — DSP Black World Gold Fund and AIG World Gold — have given annual returns of 14.75 and 22.45 per cent, respectively. Financial experts say both ETFs and mining funds are good portfolio diversifiers. Allocate 10-20 per cent of your portfolio in these schemes. This would help you hedge if equity markets were to slip. This is especially true in these uncertain times, when stock markets are susceptible to shocks from the European crisis.
Newer funds that try to combine gold with equity and debt are avoidable. “I would advise this product to someone who wants to make regular investments in gold. But, since ETFs do not have a systematic investment plan option, this could be one way of portfolio diversification. So, separate investments in gold, debt and equity are preferable,” said Suresh Sadagopan, director, Ladder 7 Financial Advisory.
Gold coins: Again, a good option and preferable over jewellery. With banks coming out with coins of lesser weight – 4g, 5g – even small investors can purchase gold. And, business has been robust. During the week before Akshaya Tritiya, HDFC Bank sold 650 kg of gold as against 360 kg they sold last year during the same time period — a rise of 80.5 per cent.
Banks, however, charge a premium for purity and certification. For instance, on Wednesday, gold prices (for 10g) were at Rs 18,880. HDFC Bank’s gold coins of 10g cost Rs 22,716 — a difference of Rs 3,836. Similarly, buying from the State Bank of India would cost Rs 20,695 — a premium of Rs 1,815. Also, since banks cannot buy back gold, given the Reserve Bank of India guidelines, buyers have to sell to jewellers.
Buyers of gold have the option of purchasing from the commodity exchanges as well. And opt for the delivery option. If you are lucky, the prices in the futures market will be lower than spot prices, thereby allowing you to pocket a neat profit.
Financial advisors feel that instead of jewellery, it makes more sense to invest in coins because of the 20-25 per cent making cost of jewellery. The sale price, as a result, might be lower to that extent.
Gold loans: The product has seen a lot of action recently. Both banks and non-banking financial institutions are aggressively advertising this product. The rates are also lower as compared to personal loans. HDFC Bank, for instance, charges 12-15.5 per cent for a gold loan. Mannapuram Finance charges 1-2.1 per cent per month, but has an interesting way of calculating the interest rate. That is, the rate of interest is dependent on the amount paid per gram. That is, if Rs 1,200 is paid per g, the rate of interest is one per cent. As the amount per g goes up, so does the interest rate. In comparison, personal loans start at 12-13 per cent. Most people have to borrow at above 18 per cent. According to Debnath, gold loans are a better option than personal loans or credit cards.