Investing in Gold: Here are some recommended methods

You can invest in gold through E-Gold, Gold mutual funds, Gold ETFs or gold bars and coins. Not to forget, many Indians buy gold jewelry that they will never use considering them as investment. Each of these has their own merits and demerits.

* E-Gold

Pros:

1. No recurring charges like expense ratio of mutual funds, ETFs involved.
2. Units as small as 1 gram can be redeemed for physical gold.
3. Greater price transparency.

Cons:
1. Separate trading account and demat account needed for trading in e-gold.
2. Not the best way to invest in terms of tax. It treated as physical gold for taxation.
3. Newly launched product in India. Commodity exchanges are not well regulated like stock exchanges.

* Gold ETFs

Pros
1. Units are backed by corresponding units of physical gold which are kept in secured vaults.
2. Returns close to that of e-gold.
3. Long term capital gains tax of 10% without indexation or 20% with indexation kicks in after 1 year. No wealth tax applies.

Cons:
1. Trading account and demat account needed for buying ETFs.

* Gold mutual fund

Pros
1. Through Systematic Investment Plan (SIP) of gold mutual funds one can affordably have disciplined investment in gold. One can invest as little as Rs 100 every month in gold funds.
2. Long term capital gains tax of 10% without indexation or 20% with indexation applies after 1 year. No wealth tax applies.

Cons
1. Expense ratio is higher than in gold ETFs.
2. Returns slightly lower than that of gold ETFs depending on fund's performance.

* Physical gold

Cons
1. Banks charge premium is charged on gold bars and coins. Reselling them is difficult.
2. Storage costs and making charges involved. Issue of safety is also large.
3. Most unfavourable way in terms of tax. Long term capital gains tax of 20% with indexation applies only after 3 years of buying it. It attracts wealth tax.

Conclusion: If you own a demat account gold ETFs are the best form of gold investment for you. If you dont, choose gold mutual funds. E-Gold needs time to mature as a product and the separate account requirements are too demanding for those not accustomed to trading. While jewelry has value as consumption article, gold bars and coins should be avoided.