In the third week of February, gold surged to its highest ever price of Rs 16,349 per 10 gm in futures trade on the Multi Commodity Exchange (MCX), mirroring a global trend that saw funds rush to pick gold as a safe investment amid deepening global recession. In the spot markets too, gold traded at Rs 15,750-15,775 per 10 gm.
And even though gold prices have come off their February highs, the yellow metal has given an average return of around 30 per cent in the past year, outperforming other traditional investment avenues like equities and bonds over the same period. With commodity analysts now predicting a second leg of this gold bull run, the yellow metal has become an attractive option for investors over the short to medium term.
So, what are the ways in which you can invest in gold? While gold exchange traded funds (ETFs) remain the preferred avenue for most investors, there are other schemes designed specifically for different types of investors. The State Bank of India’s Gold Deposit Scheme, for instance, is aimed at high net worth individuals (HNIs). Recently, an Easy Pay Scheme (EPS) has been launched specifically keeping in mind the interest of small investors.
Let’s look at EPS first. Finmarts, a sub-broker of Religare Enterprises, is offering investors an option of buying 100 gm gold through the futures route through a 100-month easy payment scheme. It also offers the option to buy 8 gm gold. Apollo Sindhoori Commodities Trading, a part of the Aditya Birla Group, offers a similar scheme but it is targeted only at working women wanting to buy 100 gm gold at a time.
So, how does EPS work? A customer begins by opening an account with the broker and is given a designated client ID, as in equity trading. Once he decides on the amount of gold he wants to buy as also the tenure of payment, the price of gold prevalent on that day is locked for the tenure. The buyer then pays upfront 15 per cent of the value of gold he has contracted to buy. He pays the remaining amount in equated monthly installments during the tenure (see Easy Pay Scheme). A brokerage charge is levied on the buyer—Finmarts charges 0.03 per cent—but at the end of the tenure this works out to be far cheaper than buying gold from a jeweller. If the buyer misses an installment, EPS allows him to either extend the period or pay up a larger sum later.
Once you have paid all the installments, you can take delivery of gold either in the physical or dematerialised form. Since the scheme is routed through the commodity exchanges’ futures contracts, the safety of your investment is guaranteed. “There is no counterparty risk and, therefore, your investment is 100 per cent safe,” says Lakshmanan Palaniappan, MD, Finmarts.
Explaining the rationale behind the 15 per cent margin that Finmarts collects upfront from the customer—which is higher than the 10 per cent or less stipulated by the commodity exchanges— Palaniappan says, “We do this to protect our investor from margin calls. So, even if the gold price falls by 5 per cent in the first month, there won’t be any need to give our investors margin calls.”
The broker buys the furthest futures contract on behalf of the client prevailing at the time of purchase, and before expiry of the contract (as stipulated by the exchange) rolls it over. Contracts are either monthly, bi-monthly or tri-monthly, which means they have to be settled by the end of first, second or third month. For instance, a July futures contract can be bought in May, and settled by July-end. In other words, the broker sells the first contract and buys the next one and continues with the procedure for the duration specified by the client. In the meantime, Finmarts regularly collects the installments. If gold prices move up during the operation of a contract, the profit gets adjusted in the mark-to-market mechanism or gets accrued to the buyer’s account on a daily basis and spills over to buy the next contract. On the other hand, if there is a drastic fall in the prices, the margin requirements are taken care of by the monthly installments already paid.
“If the buyer has a definite purpose in acquiring the gold over time and at today’s cost, he is not going to worry about fluctuations. We could always open another contract for him at a lower price point to buy afresh,” says Palaniappan. Likewise, the client can also book profits if he is not keen on taking delivery of gold. The gold is stored in a warehouse in Ahmedabad and is delivered free to the client. He, however, has to pay a VAT of one per cent.
Says Maju Nair, Assistant Vice President, Sharekhan, a broking firm: “On the face of it, the scheme is definitely attractive. But one should remember that the broker need not remit beyond the minimum margin requirement to the exchange. He would then be sitting on a pile of cash (by way of the regular installments) for a long time—while the broker would be absolutely delighted, for the customer it would be idle cash.’’ Nair also points out that the investor can as well park those installments in banks having flexi-deposit accounts or in liquid funds (for easy withdrawal) and pay up during margin pressures or at the end of tenure.
Naveen Mathur, Assistant Director for Commodities and Currencies, Angel Broking, has a word of caution for customers, though. “The broker should have a good reputation and lasting power, because the customer is entering into a deal for the long term,’’ he says.
P. Ramkumar, a stock market investor, says he is planning to buy other gold futures contracts when prices dip so that he can accumulate enough gold for his daughter’s wedding.