Gold Investment – Prudent via ETF or MF

Gold occupies a special place in most investor’s hearts and especially so in Indian investor’s hearts. Gold as an investment may be used as a hedge against inflation, deflation or currency devaluation. It has been observed that in times of economic uncertainty investors’ flock to safer investment avenues with gold being one of them. The two biggest reasons for gold prices to remain firm or even trend upward is the slowing world economy which necessitates allocating a certain portion of investment towards Gold. Thus gold should be a part of ones portfolio.

Investors have various modes to invest in gold such as jewelry, coins, bars, exchange traded funds etc.  Since most investors are well aware of investing in physical gold we shall concentrate on investing in gold in electronic form.  There are certain disadvantages associated with investing in physical gold such as the investor would be responsible for ascertaining the purity of the gold which may not be possible for all investors. Also with physical gold one is plagued with the issues of logistics i.e. storing, moving, reselling and maybe even insuring the physical gold.

Investing through Exchange Traded Fund (ETF) eliminates all these problems.  An ETF purchases a large amount of gold on behalf of the investors and stores it. The ETF then issues shares in baskets with the core idea being that the value of the shares will increase with the price of gold. Thus If the price of gold goes up by 10%, then individual shares would increase in value by the same 10%.

In addition to ETF’s there have been a slew of gold fund launches in India in the recent past by reputed Asset Management Companies (AMC) that include Reliance, Kotak, SBI among others. The schemes launched by these funds are Fund of Funds (FOF) i.e. a mutual fund that invests in other mutual funds. The schemes launched by these AMC‘s invest in gold ETF’s. The disadvantage of investing through FOF is that investors incur double the charges as each mutual fund would charge its management fee. However the advantages far outnumber the disadvantages especially for the burgeoning Indian middle class.

The gold schemes launched by these AMC’s make it possible to invest in gold through systematic investment plan (SIP). Investors investing through SIP would benefit from rupee cost averaging. When one invests the same amount in a fund at regular intervals over time, one can buy more units of the asset when the NAV is lower that is when gold prices are subdued and buy lesser units when the price of gold is higher as the NAV would also be high. With gold prices hovering above `28,000 per 10 gm mark it’s virtually impossible for the middle class to invest in gold regularly making these funds very attractive. Another advantage of these gold funds is that one doesn’t need a demat account to invest with such funds as is the case with investing with ETF’s. Investing in gold SIP can fetch investors up to 15% p.a. for investors over a period of 10 years, according to the calculation based on the price rise that gold has witnessed so far.

Thus if one wants to invest in gold one should look beyond the conventional method of investing in gold.  Happy Investing!!

 

 

By Rajat Gupta – Research Analyst – Concept Securities Private Limited

How to maximize return on equity investment?

Equity has proved itself to be the best investment instrument as far as the returns are concerned provided that one has a medium to long term horizon. After a turbulent 2011, the equity markets did very well in 2012 and are continuing the momentum in 2013 owing to reform drive by the Government.  While, equity markets are up, most investors are complaining of being left out or being trapped at wrong basket of stocks. Today, we will focus on things to consider while investing in any stock.  While there cannot be any hard and fast rule to maximize returns on equity investment, the following top down approach will enable the investor to gauge the potential of an investment opportunity. In this approach, we need to focus on economy, industry and the company in order to establish the suitability of any investment.

Economy

The first step is to study the macro and micro economic indicators such as GDP, inflation, unemployment, demand & supply etc. in order to be assured of the feasibility of the economic environment where the company is operating.

Industry       

It is important to study the various features of industry in which the company is operating such as intensity of competition, bargaining power of buyers, threat of new entrants, Govt regulations etc.

Company

Last but not least one must analyze the company in detail using various parameters such as financial statement analysis, corporate governance, company’s track record etc. It is imperative to gauge the competitive ability and scalability of the company which will play a key role in the market performance of the company.

Apart from the aforesaid analysis, one must also look at the price value divergence.  Even if a business possesses all the above characteristics but is not available at favorable valuation then it is prudent to avoid the stock as the valuation may not leave much upside for the stock. 

Conclusion

Although, volatile environment tends to keep investors away from this instrument, we feel that if one has a longer horizon, equity still remains the best investment instrument considering its ability to generate returns far superior than any other. However, due care must be taken while investing in equity and for retail investors Mutual Fund remains the best mode of investing in equity. At the same time, HNIs must consider investing in equity through PMS route which will enable personalized monitoring of their investments. 

By Rajat Gupta – Research Analyst – Concept Securities Private Limited