Why investing in gold monetisation scheme may not be a bad idea after all

Earning returns from an asset lying idle can be a good option in times of volatility, says Manish Shah.

Indians love physical assets - gold and real estate - and have emotions attached to it. Tell us about ancestral property or jewelry that’s an heirloom, and we stop viewing it as an asset with monetary value.

We hold on to property because “it was my grandfather’s last wish to not sell it ever” and let it out despite low rental yields (annual rent earned from a property divided by its market value) of 2-3 per cent.  Besides, we often associate prestige with property ownership, as we do with gold.

Owning precious yellow metal - usually as jewelry - fills you with sense of pride and accomplishment even if that ends up adorning the inside of a bank locker instead of you.

According to the Karvy’s India Wealth Report FY 2013, the total individual wealth in India stood at Rs 201.90 lakh crore of which financial assets accounted Rs 109.86 lakh crore, and physical assets were Rs 92.06 lakh crore. Gold emerged as the single-largest asset class with a 30 per cent share of total assets.

Source: Karvy India wealth report.

In order to mobilize the gold held by households and institutions, which is 'neither traded nor monetized' and is estimated to be over 20,000 tonnes (roughly worth Rs 60 lakh crore at the current market price), the government recently announced a Gold Monetization Scheme (GMS).

Under the new scheme, anyone with a minimum of 30 gms of gold, (bullion or jewelry) can get it assayed, assessed and deposited with banks (which will open an account). As per the current structure, the investment will fetch an individual 1 per cent return, free from wealth or income tax. However, banks have been given the freedom to take a call on the rates they want to offer.

Though the scheme requires further clarity and is in the draft stage currently, experts feel investors should opt for it, considering that it would generate more returns in addition to appreciation.

Gold as investment

Considered one of the most rewarding asset classes for the better part of the last decade, gold had a dream run till 2013. However, prices witnessed a sharp correction in the past 3 years (from the second quarter of 2013) on the back of subdued demand, import curbs and other macro-economic factors.

In the table below we compare how gold has performed against other asset classes since 2011.

In the last 4 years, equities and fixed deposits have outperformed gold. Moreover, in the last three years (2012-2015), the yellow metal has delivered negative returns of -1.67%, as against 10.80% by equities.

We still love bling!

Unimpressive returns have not dissuaded us from buying gold.Despite high prices we find long queues outside jewelry shops during festivals such as Akshay Tritya and Dhanteras -- these are auspicious occasions to buy gold.

Long perceived as a hedge against inflation, gold also helps during financially difficult times, can be a collateral for loans or a wedding gift. Thus, it is viewed more much more than mere investment.

Remember, that stunning gold necklace that your parents gifted you for your wedding. When was the last time you wore it? May be the wedding day itself. Probably after that day you did not find a suitable occasion to wear it again or were too lazy to take it out from the bank locker. It’s still lying there. While you may consider it a saving, gold has actually lost value, over the last few years.

Gold Monetisation scheme - A great option to realise more from your idle gold

Investing in Gold Monetization Scheme guarantees minimum 1% returns on the present investment value.

As per its the current draft (available at mygov.in), both principal and accumulated interest will be paid to gold depositors on maturity and will be valued in gold. E.g. A customer who deposits 100 gms of gold and gets 1% interest will on maturity have a balance of 101 gms of gold in his account.

The customer will have the option of redeeming this as cash (at the prevailing value) or in gold. This option needs to be indicated while making the deposit. The returns would be exempt from capital gains tax and wealth tax.

The deposit term will be minimum one year and in multiples of a year thereafter. Like a fixed deposit, breaking the deposit prior to the maturity will be permitted.

However, to make the scheme a success the government needs to address:

Minimum returns: Industry experts prefer the interest rate to be about 4-5 per cent which makes it compelling enough to attract investors, especially women to part with their beloved jewelry.

Secondly, a requirement to declare the sources of funds for purchasing the gold may be a deterrent for this scheme as a significant portion of India’s gold is purchased with cash payments.

Manish Shah is co-founder & CEO, BigDecisions.com