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Want to create a gold portfolio? Here's some help.

Gold has been perhaps the only asset class to have kept its head high among the financial turmoil that has taken over the world. Most analysts talk about gold as being a hedge against inflation. At the same time, there are others who say that gold merits no inclusion in the portfolio as the returns are generally quite average.

While there are a lot of merits to why one must have gold, what is more important is the quantum or per cent of the portfolio that should be in the yellow metal.

And it can be achieved only through asset allocation. While there is no thumb rule as such, but you can allocate anywhere between 5-10 per cent of your assets to gold. This can change, based on opportunities and economic scenario.

Most people in India hold gold in the form of jewellery. Additionally, some also hold it in the physical form like bars or coins. However, you can also invest through exchange-traded funds (ETFs) and mutual funds that invest in gold mining companies.

One of the biggest advantages of investing in gold ETFs over physical gold is that you can buy this at spot market prices. Since the former are in a dematerialised form, there is no cost of storage and insurance.

Since the gold is 99.99 per cent pure, you are assured of its purity. This is a concern when buying direct gold. Additionally, gold ETFs are far more tax-efficient as they do not attract any wealth tax and long-term capital gains arise when you sell just after 1 year. On the other hand, both physical gold and jewellery will attract wealth tax. Also, it has to be held for three years to take advantage of long-term capital gains.

Coming to gold mining funds, there are two fund houses that have this product – DSP ML World Gold Fund and AIG World Gold Fund. These are funds that do not invest in direct gold but invest in gold mining companies. The tax treatment for these investments is similar to ETFs and is a good indirect way to take exposure to gold. These are, however, more volatile investments than gold and can move sharply up and down as their correlation with the equity market is much higher than that with gold prices.

DSP ML World Gold fund had a stellar run, returning 60 per cent in 6 months since it's inception in 2007, but then had a major correction when gold equities took a beating around the world. Even when equity markets continued to slide, gold funds did exceptionally well in the first 4 months of the year 2008.
 

COST-BENEFITt
INVESTMENT	COST	TAXATION
JEWELLERY	Labour charges and markups are high and can go as high as 15-30%	Wealth Tax applicable  LTCG  after 3 years - 22.66% with indexation, STCG 33.99%
GOLD COINS	Are expensive than the spot price of gold. (When spot prices were Rs11,800, coins  were priced between Rs 13,500-14,000)	Wealth Tax applicable LTCG  after 3 years - 22.66%  with indexation, STCG 33.99%
GOLD ETF	0.5% brokerage per transaction (buy or sell) 1.0% annual expense ratio	No Wealth Tax LTCG  after 1 year - 22.66%  with indexation, STCG 33.99%
Gold Equities- DSP ML WORLD GOLD FUND	2.25 % entry load,  0.75 % annual expense ratio	No Wealth Tax LTCG  after 1 year - 22.66% with indexation, STCG 33.99%

These two gold funds are feeder funds that instead of investing directly in gold mining companies abroad do so through a gold fund of Merrill Lynch and AIG Global respectively. Both the World Gold Funds are treated as debt funds.

In the last two months, DSP World Gold Fund has delivered an astounding 62 per cent returns. This is exceptional, since ETFs and physical gold barely delivered around 17 per cent during the same period. Even AIG World Gold Fund managed to deliver a handsome 42 per cent absolute returns.

These gains were primarily due to the fantastic recovery of gold mining stocks. Some of these stocks have delivered returns in the range of 50 -65 per cent.

So considering that there are so many choices within the gold asset class, here's a example of how to create a gold portfolio. This is just an indicative structure and it could vary from person-to-person.

INVESTMENT STRATEGY

 

 

50 per cent in ETFs.

40 per cent in funds of gold mining companies.

10 per cent in physical gold

Jewellery is considered a personal asset and not an investment and hence should be excluded. However if you were to include Jewellery to be part of your portfolio, then 30-40 per cent can go in jewellery, 40 per cent in ETFs and 20-30 per cent in equities.

The writer is director, My Financial Advisor