The lure of the gain from gold is understandable. Investors have, for the past couple of years, made pots of money by investing in it. While traditional routes like exchange-traded funds, physical gold and savings funds are normally recommended many investors wanting to enhance their returns, are being advised futures as well.
According to Chirag Sheth, senior vice-president of Latin Manharlal Commodities, the advantage gold futures has over spot gold is cost efficiency in terms of the initial investment. “In futures, one has to shell out only 7.5 per cent, as against paying a lump sum in spot to take delivery. The overhead costs in spot gold are also comparatively higher,” he says.
For instance, you buy futures contracts worth Rs 1 crore. But you need only Rs 7.5 lakh to execute the trade or 7.5 per cent of it. Of which, five per cent is the mandatory initial margin to transact and 2.5 per cent is the value at risk (VAR) of the deposited amount. The VAR usually changes, depending on the volatility of gold prices.
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If you were trading in spot gold, you would have to shell out the entire Rs 1 crore in one go.
“Apart from VAR,” says Naveen Mathur, associate director- commodities and currencies at Angel Broking, “Individuals trading in futures also have to pay brokerages, turnover and service tax, stamp duty to the government and educational cess.”
There are three contract sizes you can buy with Multi-Commodity Exchange (MCX): 100g, 1 kg and 1g petal (only if you agree to take delivery of minimum 8g gold).
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However, you need to necessarily have a demat account for this. Here is your expense sheet—Demat maintenance cost of Rs 400-500 a year and brokerage fee of one to five paisa per transaction or Rs 1,000-5,000 per Rs 1 crore. Add to that, a transaction fee of Rs 250 and stamp duty of Rs 100 every Rs 1 crore.
In comparison, other forms of investment allow you to invest much smaller amounts if you don’t opt for lump sum investment except ETFs. For instance, gold feeder funds allow you to invest systematically for as low as Rs 100 and you can buy as low as 1g gold and take delivery with the National Spot Exchange. The other expenses involve an expense ratio of 1.5 per cent in case of gold feeder funds. Though e-gold has a brokerage of 0.25-0.5 per cent, a transaction fee of Rs 20 per transaction, and demat maintenance cost Rs 400-500.
Operating in futures involves a larger investments and speculation in the futures market of the underlying asset and, hence, is a high-risk avenue requiring experience. Therefore, it is not recommended for individual investors.
Also, as the gold market in India is open from 10 am to 11.55 pm, there are chances traders may lose out on some trades because of the gold price fluctuations happening in other markets which remain open. The US gold market is open 24 hours as they have electronic contracts and there may be times that the international prices move sharply while you are unaware and you lose money, depending on your position.
As an investor, you should keep track of your futures positions. For, brokers, at times, forget to square off the positions. Result: you may be forced to take delivery on full payment, making it very expensive.
Usually only one per cent of the exchange turnover in gold futures gets materialised into delivery, indicating it is an avenue for short-selling and not for long-term investments. Whereas, individual investors prefer spot gold because you can make small investments and can hold on to these for a longer period of time.