In short, electronic form of gold is better than physical form if you are buying to for an investment.
Physical Gold
Gold can be bought in the form of coins and bars. The coins come in different sizes (1 gram, 2 gram, 5 gram,10 gram, 20 gram and 50 gram in India, 14mm, 22mm, jewellery etc diameter in the US, commemorative 1 US$ gold, and various such other forms).
Bars are normally available in 100 grams. However, to cater to the need of retail investors, dealers in physical gold are willing to cut a part of the gold equivalent to buyer’s requirement.
The advantage is that the gold is in the hands of the investor. However, there are many disadvantages of holding gold in physical form. It does not have utility value, can be lost (or stolen) and requires the investor to make arrangements for appropriately storing it. There can also be trust issues with respect to the quality of gold.
Gold Mutual Funds
This is increasingly becoming the mode of holding Gold from an investment perspective. They allow investors by units of a gold fund on the stock exchange. The gold fund is a passive in gold investment. Let us understand this with the help of an example.
M/s Glitter Asset Management company comes up with a Gold Fund, wherein it offers units to investors at an initial price of Rs.10 per unit. A person willing to invest Rs.1000 in gold can buy 100 units of this fund while a person willing to invest say Rs.50,000 can buy 5000 units.
In total, the fund collects Rs.100 crores from all investors, issuing 10 crore units. Let us say, the price of gold on that particular day is Rs.2,50,000 per kilogram. The Gold fund buys 4,000 kgs of gold. In the next one month, gold prices shoot up to say, Rs.275,000 per kilogram. This means the value of gold held by our fund goes up to Rs.110 crores (4000 kg *Rs.275000 per kg).
This translates into the value of 1 unit of the gold fund increasing to Rs.11 (Rs.110 crores of fund value / 10 crore units). Thus, a person who bought only 100 units of this fund sees an appreciation of 10% in his portfolio. If he wishes to sell his investment, he can redeem the units of this gold fund with the Asset Management Company at the prevailing NAV of Rs.11 per unit.
Thus, a gold fund facilitates small investors also to do gold investments. Since the fund is actually buying and selling the gold as well as holding the gold, there are no worries pertaining to quality of gold, storage and the risk of paying higher (making/ wastage, etc) or selling lower ( deductions). However, a small asset management fee has to be paid to the fund.
Gold ETFs
Gold ETFs are Gold Funds that are exchange traded funds. Investors can buy/ sell Gold on the stock exchange by buying/selling the Gold ETFs. Gold ETFs have all the advantages of a Gold Fund. However, investors need to open a Demat account for holding Gold ETFs.
To sum up, Gold investment should be a part of every investor’s portfolio. While Gold Funds and Sovereign Gold Bonds appear to be the best way of holding Gold, the choice really boils down to what one feels is convenient for oneself.
Read more: https://www.jama.co.in/gold-investment-portfolio/
