GOLDSMITHS OR JEWELLERS?
While this is a conventional and convenient source of purchasing gold and gold ornaments, it has its disadvantages. Firstly, investing directly in gold bars or coins is much better than investing in gold jewellery. But if you buy gold bars or coins from your local jeweller, you are not sure of the purity of the gold. Moreover, the price they sell the gold to you is not very transparent and there is a large spread between the price at which they sell and buy gold.

However, remember that when you buy gold jewellery, you pay the price for 24 carat gold, but may get 22 carats or less. Then, there are making charges of 8-10 per cent of the price of gold.

BANKS
The advantage of buying gold from a bank is that one can be sure that the gold is pure 24 carats. However, there is a very big disadvantage in buying gold from banks. Banks generally charge around 5-10 per cent higher than market prices for the gold they sell to customers. Therefore, though this avenue ensures availability of pure gold, it is not price efficient. Another disadvantage is that banks do not offer a repurchase option to investors. Therefore, investors wanting to sell their gold purchased from banks, have to do so through other sources, or sell to their local goldsmith at lower than market prices.

GOLD ETF'S
Many mutual fund houses have launched Gold Exchange Traded Funds (ETF's). An ETF is a mutual fund that is listed on a stock exchange and the units of the ETF are traded like shares on the exchange. All these funds are listed on the National Stock Exchange (NSE).

These funds invest 90-100 per cent of their corpus in gold and 0-10 per cent in money market instruments and try to replicate market returns of the underlying commodity, i.e. gold. The trading units are as low as 1 gram of gold, making it extremely affordable and accessible for the common investor.

There is ample liquidity in the trading of these units and spreads between buying and selling are very low. Brokers charge delivery brokerage on purchase of these units, which can be as low as 0.25 per cent. Gold ETF's are subjected to lower exchange transaction charges and STT is not levied on such transactions, making transaction costs affordable. The delivery of these units are received by the investor in the dematerialised mode in their demat accounts, thus saving them from the hassle of going and taking physical delivery of the gold.

This makes gold ETF's an ideal investment avenue for a lay investor to invest in gold at market related prices at very low transaction costs. Moreover, disciplined investors can also start a Systematic Investment Plan in gold ETF's by purchasing a certain value of gold units every month. This can be extremely useful both as a long- term investment, as well at the time of children's marriage, when these units can be sold and physical gold can be bought in its place.

However, gold ETF's also have a disadvantage in the fact that they charge a high fee of 1 per cent a year as fund management fees, along with other charges at actuals. However, they have a distinct tax advantage over investments in physical gold. While long- term capital gains (LTCG) benefits are available after 3 years for investments in physical gold, the same is available after one year for Gold ETF's. This is because their tax treatment is like that of debt schemes of mutual funds. Moreover, they are not subject to wealth tax as opposed to physical gold holdings.

COMMODITY EXCHANGES
One can take delivery of gold through commodity exchanges like Multi Commodity Exchange (MCX) and National Commodity and Derivative Exchange (NCDEX) as well. These exchanges have gold trading contracts in various sizes to suit every investor. The exchanges allow investors to take delivery of pure gold either in demat or physical form at very low brokerage rates of around 0.25 per cent and that too at market prices with minimal buy-sell spreads. However, one has to pay nominal warehousing charges in case they take delivery in demat mode. This route is better suited for larger and more market savvy investors.

The writer is a certified financial planner