Gold Deposit Scheme For HNI, Trusts and Companies

India is the largest consumer of gold in the world and accounts for around 20 % of the world demand.

Gold had always been perceived as the best friend during the crisis and meteoric rise in gold prices during the past several years has portrayed gold as one of the most sought-after investment options.

But majority of gold in India is in the form of jewelry which is often unaccounted and undeclared.

To bring this idle gold into the mainstream gold deposit scheme was conceived.

Modus-Operendi of the Scheme

Designated banks accept gold from investors to melt and turn into pure gold bars, and interest bearing certificates are issued to investors in-lieu of the gold deposited. These certificates can be redeemed in gold or cash on the maturity date.

Interest paid is nominal and ranges between .75 to 1% only.

Such schemes accept at least 500 gm gold or more (no upper limits) thus suitable for HNI’s, affluent HUF's, companies and trusts only.

Presently SBI is offering the gold scheme.

Advantages:

·         Freedom from the risks of storing physical gold like larceny or robbery

·         Though nominal but Interest is receivable on the idle gold along with the appreciation(if happens)

·         Locker or safe custody charges are saved

·         Rupee loan against the bonds can be availed

·         The biggest advantage is Income Tax, Wealth Tax and Capital Gain Tax are exempted

Disadvantages

·         In case of gold jewelry value addition (cost of making ornaments) is lost which may be significant in case of designer ornaments

·         If the bond issuing agency becomes the bankrupt investment shall be jeopardized (Though bonds come with a forward cover from the central bank)

Investment in Gold

                                              

There is an old maxim in Sanskrit (an old Indian language) that has become an axiom these days -“सर्वे गुणाः काञ्चनमाश्रयन्ति ” means all virtue lies in the beholder of the gold.

With increasing inflation and debasement of world currencies gold prices are rising exponentially.

Recently, when standard and Poor’s lowered US credit rating outlook due to widening deficit, resulted in  weaker dollar, which bears the inverse relationship with gold.

US treasury department projects that government could reach debt limit ceiling of $14.3 trillion by mid may,  and such a huge borrowing requires debasement of the local currency.

Debt concerns in USA and Europe are boosting gold prices as gold is used as the currency alternative.

Whenever there is tensed geo-political situation or hyper inflation, investors seek refuge in gold as it’s the best hedge.

Gold Facts:

(1)Annual world gold demand is about 4000 tonnes.

(2)Jewellery accounts for largest demand about 2200 tonnes.

(3)Overall industry demand including dental industry is about 450 tonnes.

(4)ETF and other funds with gold as underlying, accounts for around 350 tonnes .

(5)Gold mine production  is declining day by day and was never more than 3600 tonnes since 1981.

(6) No significant success in finding new mines.

How an investor could start investing in gold

(1)Physical gold: Traditional way to invest in gold was buying gold jewellery but it involves labour cost and the purity of the jewellery is often questionable.

Though gold coins sold by banks are pure but banks don’t buyback these coins. One has to go to goldsmith’s shop to liquidate these coins.

Besides this storage of physical has its own risks like larceny, robbery etc.

(2)Gold future: It’s not an investment as one has to rollover his positions each month, besides this future contracts' have high cost of carry .

(3)Gold ETF: Gold ETF’s are mutual fund scheme that are listed and traded on exchanges like stocks.

(4) E-gold from  National Spot Exchange  Limited(NSEL): NSEL is the national level institutionalized, electronic spot market. It is more beneficil for active and large  traders/investors and here physical delivery of gold could also be taken.

Transactions costs are lower than Gold ETFs and it requires registering as client with any members of NSEL and opening demat account with any DP(Depository Participant) empanelled with NSEL.Thereafter client can trade online or offline.

If not ULIP, then?

It is advisable not to mix investment with insurance. For those who don’t want to go for ULIP's should go for a combination of term plan and investment in MF.


Term plan should be chosen with the life cover of 10 times of once annual income.

Having paid the premium of the term policy, remaining capital should be used to invest in the diversified MF through SIP option to cope with the wild market swings.

Investment Flow Chart