This Diwali, is gold a good investment option?

To many Hindus, Diwali begins on Dhanteras, the day one traditionally buys gold as a tribute to Lakshmi and Kuber, the goddess and god of wealth, respectively. Whether you subscribe to that belief or not, it may be a good time to buy gold anyway, since the depreciating rupee has increased gold’s value in the international market; gold is usually denominated in US dollars.Gold is also a good hedge against inflation. “If we look at gold over four decades, since 1983, it has grown at a CAGR [compound annual growth rate] of 11% in INR [Indian Rupee], which is above inflation," says Somasundaram PR, regional CEO, India, World Gold Council. “The current price in INR is lower than the peak we have seen when the rupee-dollar exchange rate was far stronger, so there is a latent upside in INR terms.”Safe option over the long termThe price of gold tends to remain stable over long cycles and it is considered to be a safe investment option. Over a three-five year period, gold has offered an annualised return of 10-11%.The real test of gold, however, comes at a time when interest rates increase because that’s when gold prices come under pressure.“Investors prefer to keep money in bank accounts rather than in commodities when interest rates increase,” says Ashutosh Datar, co-founder, IndiaDataHub, a market data and analytics startup. !function(){"use strict";window.addEventListener("message",(function(e){if(void 0!==e.data["datawrapper-height"]){var t=document.querySelectorAll("iframe");for(var a in e.data["datawrapper-height"])for(var r=0;r That is exactly what is happening now as inflation and interest rates are high in the US, causing a downward pressure on gold prices.However, savvy Indian investors would understand that the value of their gold holdings is up due to the rupee’s depreciation. So, while rising interest rates seem to have dulled gold’s sheen, the depreciating rupee has, in fact, increased the value of their holdings.What form should gold take?The most obvious answer is gold jewellery, which is generally the form that most people seem to prefer at Dhanteras, judging by the hordes thronging jewellery stores. Others prefer gold coins.Watch: Best ways to invest in gold medium nocaptionhttps://youtu.be/sJR0ge1779w=undefinedShould you take your old gold and exchange it for new ornaments or should you exchange it for cash and invest in a sovereign gold bond or a gold exchange-traded fund (ETF)?“It all depends on what you are looking for,” says Arnav Pandya, founder, Moneyeduschool, which focuses on financial literacy efforts. “In case you want to buy jewellery for your use or for your children, go ahead and buy it, but if you wish to look at gold as an investment, you should buy sovereign gold bonds or gold ETFs.”Gold jewelleryIndians love buying gold jewellery and coins, especially at this time of the year. Currently, 22 carat gold is priced at Rs 4,700-4,800 per gram in Mumbai. The advantage of buying gold jewellery is that you own something valuable and aesthetically pleasing, which you can pass on to your heirs.Jewellery stores such as Tanishq offer customers the option of exchanging old gold jewellery for new. Old Tanishq jewellery is valued at the prevailing gold rate multiplied by the weight of the jewellery and nothing is deducted from this amount if you are opting to buy new jewellery from their store. medium94985337Many branded jewellery stores deduct 2-3% from the value of the jewellery in case you wish to exchange old jewellery (which has not been purchased from their store) for branded new jewellery. Sometimes stores also deduct a certain percentage if instead of exchanging old jewellery for new, you wish to take back cash. The downside of buying jewellery as an investment is that you often end up paying more than the value of the gold in the form of making charges and goods and service tax, and you also lose this money when selling. There’s also the issue of safely storing the jewellery.Gold ETFs and Mutual FundsETFs are a digital form of holding gold without the hassle of storing physical gold and the fear of theft. You can buy and sell gold ETFs just like you would trade in stocks. On redemption of gold ETFs, you don’t get physical gold, but receive the cash equivalent.Gold ETF trading takes place through a dematerialised (demat) account and a broker. Buying 1 gold ETF is equivalent to buying 1 gram of gold and ETFs are backed by gold of very high purity. Moreover, the price of the ETF remains the same anywhere in the country as ETFs are listed and traded on the National Stock Exchange and Bombay Stock Exchange. medium94985538“However, this option is useful only for those who are looking at trading in gold, and it is not ideal for long-term investments,” says Datar of IndiaDataHub. He believes that sovereign gold bonds would be a better option for long-term investors.Gold mutual funds invest primarily in gold ETFs and the underlying asset for these funds is physical gold. You can purchase gold funds directly from the asset management company using your demat account. Funds offer greater liquidity compared with physical gold and sovereign gold bonds. Sovereign gold bondsSovereign gold bonds are issued by the Reserve Bank of India (RBI) on behalf of the government at a rate declared by the RBI. The tenor of the bond is for eight years, with exit options in the fifth, sixth and seventh years. A fixed interest rate of 2.5% payable half yearly is offered on these bonds and they can be held in demat format.The price of the bond is fixed in rupees on the basis of a simple average of the closing price of gold of 999 purity published by the India Bullion and Jewellers Association for the last three business days of the week preceding the subscription period. The bonds are denominated in multiples of gram(s) of gold with a basic unit of 1 gram. !function(){"use strict";window.addEventListener("message",(function(e){if(void 0!==e.data["datawrapper-height"]){var t=document.querySelectorAll("iframe");for(var a in e.data["datawrapper-height"])for(var r=0;r “Another attraction of sovereign gold bonds is that they are exempt from capital gains tax,” says Ravi Saraogi, investment adviser and co-founder of Samasthiti Advisors.The maximum one can invest through these bonds is 4kg of gold.Digital goldBonds are not the only option for investors. Digital gold is another option too.MMTC-PAMP, a joint venture between government undertaking MMTC and Switzerland-based bullion brand MKS PAMP, offers the opportunity to buy gold for even Rs 100. Digital gold is seen as far safer than investing in gold schemes with small jewellers, who could just disappear overnight.Another offering for digital gold comes from Safegold, which allows customers to buy and sell vaulted gold (gold bullion stored in bank vaults) at low ticket sizes around the clock.However, since digital gold schemes are not yet regulated by the RBI, investors are advised to tread carefully.A gleaming addition to portfoliosAs a long-term investment, investors should consider keeping at least 3-5% of their portfolio invested in gold.As Somasundaram says, “We are very positive on gold price in the long term as structurally gold has huge potential for much stronger penetration in the investment world in many markets. The headroom for further risk and uncertainty in many markets has dropped.”Hopefully as interest rates start lowering in the US, gold will regain its shine. medium94985412How to turn inherited house, gold or land into asset medium94985423