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The average return on gold in the past year has been around 30%. But if you are planning to buy gold for investment purposes, make sure it comes with tax benefits and security
GOLD has been doing well because of inflationary fears and the downtrend in equity markets. It is also proving to be a good hedge against inflation, justifying Indians' age-old faith in the yellow metal. The average return on gold in the past one year has been in the range of 30%, making it one of the best performing asset classes right now.

"Due to the current economic downturn and inflationary fears, gold is doing well," says Keyur Shah, associate director, World Gold Council, India. Gold has been rising over the past one year and experts feel the trend will continue. Some analysts expect the average gold price to hover around Rs 14,000 (per 10 gram) by December 2008. Considering that gold prices are fluctuating between Rs 12,500 and Rs 13,000 of late (after touching the high of Rs 13,680 on July 15), there is still some upside. "A weak dollar following a slowdown in the US will definitely boost the value of gold even further," says Kartik Jhaveri, director, Transcend India.

Physical gold
While individual gold holdings are the highest in India, most of it is in the form of jewellery. But jewellery is an uneconomic method of holding gold as on selling jewellery you will lose up to 10% of the gold value and also the making charges that you paid during the purchase. "Those who want to buy gold for investment, prefer buying medallions and bars - this category has been growing in India over the past few years," informs Mr Shah. Although coins and bars do not attract making charges, the sale discount is still there if the gold is not hallmarked. Hallmarked gold attracts the lowest discount and can be sold at 1-2% lower than the market value.

Gold jewellery is not as good a investment as it is not as liquid as bars or gold funds, points out financial planner Gaurav Mashruwala. If you are saving to buy jewellery it makes sense to buy gold coins. These coins are accepted by jewellers in return for gold used in jewellery. If you intend to sell the coins, you may have to take a discount of up to 4%, irrespective of how pure are the coins/bars. But if you are holding a large quantity of gold, you will have to make provisions for storage and insurance as there is a security issue in keeping gold at home.

Gold exchange-traded funds (ETFs)
Gold ETFs are quite similar to mutual funds. The money you invest in gold ETFs is used to purchase physical gold of equivalent value. The advantage of ETFs are that the fund house that issues the gold ETF takes over the responsibility of storage and insurance of this gold. Gold ETFs are also tax efficient unlike physical gold. "While physical gold is considered a long-term investment, only if you hold the same for three years, gold ETFs acquire this status after one year," says Mr Mashruwala. In short, selling gold within three years of purchase will attract capital gains tax. Moreover, holding large quantities of physical gold can attract wealth tax, while gold in demat form does not.

This apart, the spread between the buy and sell prices pertaining to gold ETFs is less than that of physical gold. In other words, while your jeweller could sell you a gram of physical gold at Rs 105 and buy the same at Rs 95, you can buy a unit of gold ETF at Rs 101 and sell it at Rs 99. "Doing an SIP in gold would be the best option in the current scenario," reckons Pritam Patnaik, AVP, Kotak Commodity Services.

The two gold ETFs that are more than a year old - Gold Benchmark ETF and UTI Gold ETF - have delivered more than 40% returns in the last one year. In case of others too, the returns have been positive for most months, in contrast with equity and debt funds that have posted negative or mediocre returns. However, the two world gold funds, which invest in stocks of gold mining companies, have had to suffer a fate similar to other equity funds. "It is advisable that you invest in gold as a commodity. Gold funds basically invest in gold mining companies. If you buy a gold fund, you actually invest and take a risk on that company and not on gold," adds Mr Gopkumar.

Report : Vidyalaxmi And Preeti Kulkarni