NRIs follow the golden rules on safe-haven investing

Non-resident Indians living in the UAE are moving away from traditional routes of buying physical gold in the form of jewellery to more sophisticated investment options such as gold-linked ETFS and mutual funds.
Dubai resident Kanta Jethwani believes that gold is a commodity to invest in, although she has yet to actually do so. Courtesy Kanta Jethwani
Dubai resident Kanta Jethwani believes that gold is a commodity to invest in, although she has yet to actually do so. Courtesy Kanta Jethwani

Abu Dhabi resident Sojy Raphael regularly buys gold jewellery as an investment.

“Gold is an alternative investment and good for the long term,” says Mr Raphael, from Kerala in India, who has worked as a draftsman manager in the UAE for 10 years.

He buys about 50 grams of gold jewellery every year in the Emirates as it works out about 5 per cent cheaper than buying it in India. Now, however, the 34-year-old is exploring more sophisticated ways to invest into the commodity, such as gold exchange traded funds (ETFs).

Gold has long been a popular investment among Indians, partly because it has a significant role in India culturally.

But beyond purchasing gold jewellery in the gold souq, non-resident Indians (NRIS) in the UAE are also moving towards a range of other investment options such as gold bars and coins, as well as ETFs or online gold accounts

Bhavana Acharya, a mutual fund analyst at FundsIndia, an online investment platform, says a distinction has to be made between gold intended for consumption and gold as an investment.

“If the objective is investment, then it is prudent to go for options that provide liquidity, transparency, where costs are kept in check and where there is no doubt over purity,” she says. “If the idea is to actually use or wear the gold jewellery, then it’s best viewed as consumption and not strictly for investment.”

NRIs can invest in gold ETFs and gold funds in India, which are mutual funds that invest in ETFs. These have the advantage of lower charges, no storage issues, and liquidity over jewellery and other physical forms of gold, Ms Acharya says.

“While buying jewellery or gold coins, you incur high making charges, running up to even 10 per cent or more,” says Ms Acharya. “Given that financial gold can be held in electronic form, it’s also easier to store safely.”

Gold prices have rallied since the beginning of June from just above $1,200 an ounce to hit a more than two-year high of $1,375 an ounce. This week gold was trading at about $1,330. With the precious metal often considered a safe haven, the rally has been driven by the volatility of global equities and low interest rates, and the United Kingdom’s vote to exit the European Union.

As a result, some experts say that gold is an investment avenue that NRIs can consider as part of their portfolio to diversify and reduce the risks that come from placing all their eggs in one basket, particularly during this period of uncertainty.

“Each asset class got its own merits and demerits,” says Jose Mathew, the head of retail business at Federal Bank, a major Indian bank headquartered in Kochi in Kerala. “Gold diversifies the portfolio and thereby reduces the risk exposure of the portfolio of an investor.”

He advises NRIs to allocate between 5 to 15 per cent of their entire portfolio to gold and points to historical trends showing that when the Sensex, the Bombay Stock Exchange benchmark index, plummeted, the yellow metal acted as a safe haven and managed to buffer portfolio losses.

Mr Mathew warns that individuals investors in the precious metal should not expect the sharp returns other types of investment can potentially deliver.

“Gold is an asset, the value of which does not fluctuate much, unlike shares or mutual funds,” he says. “This also means that gold does not appreciate sharply like shares or mutual funds or even real estate.”

But not everyone is convinced.

Dubai resident Kanta Jethwani believes that gold is a commodity to invest in, although she has yet to actually do so.

“It is a good investment for the future,” says Ms Jethwani, 46, the chief executive of Bloom Aesthetic and Laser Clinic. Originally from Hyderabad, she has been living in Dubai for the past 23 years and considers it a “safer option over other investments” with her preference physical gold, in the form of gold bars, rather than products such as ETFs.

So, how does a gold ETF work?

“A gold ETF pools money from a group of investors and buys gold bullion,” Ms Acharya explains. “It creates units to represent this gold and lists these units on the stock exchange. You can buy or sell these units like you would with a share.”

Gold funds incur marginally higher expenses than ETFs, which have management fees of about 1 per cent, she says.

“Gold funds and ETFs are highly liquid. While selling gold jewellery or coins, a jeweller may not always buy it back from you, especially if it was purchased from another jeweller. Since an ETF is traded on the stock exchange and gold funds are run by asset management companies, you will always be able to sell your gold, with no hassle.”

While gold ETFs can be purchased through brokers in a similar way to buying equities, NRIs can invest in a gold mutual fund through a mutual fund distributor or directly with the asset management company. “NRIs can invest in all gold funds or ETFs that are on offer,” adds Ms Acharya. “They can even make regular investments in small amounts.”

NRIs cannot, however, invest in India’s recently launched sovereign gold bond scheme – government securities denominated in grams of gold, which are alternative to holding physical gold, and can be bought through banks. A major advantage of the scheme is that the storage risks and costs are eliminated and the investor receives an interest rate of 2.75 per cent a year on his or her investment. When the bond matures, it is redeemed at the market rate for gold.

Here in the UAE, Atish Banerjee, 30, an art director at an advertising agency, was considering opening an online gold account with Emirates NBD. This facility allows customers to purchase gold online without physically holding the metal.

But he changed his mind after gold prices rose substantially.

Instead, he purchases small amounts of the metal in the UAE – such as pellets and coins, bought from certified jewellers – to take to India.

“I carry some gold when we travel to India, within the customs limit, as gold is a little bit more expensive in India,” says Mr Banerjee, who moved to Dubai from Mumbai a year ago. “But I have my doubts if it’s a good idea as the quantity I carry is small and gold is only marginally cheaper here than in India.”

The exchange rate of the rupee against the US dollar and taxes mean that gold is more expensive in India than the UAE.

As a result, Indian authorities have been trying to reduce the amount of gold brought in because it is considered an idle asset. A series of hikes on import duty means taxes of 10 per cent must be paid and there are limits on how much gold NRIs can carry into the country.

Plus Mr Banerjee says he is “a bit sceptical about how valuable gold is in the long term as inflation rises”.

Anshuman Mishra, the founder and chief executive of LoanAdda, an online aggregator of financial products and services, says NRIs must carefully consider what percentage of their portfolio to allocate to gold.

“Gold is a non-productive asset as compared to purchasing real estate or a home in India and returns from gold are rarely as beneficial as from productive assets classes like equities,” he says.

He also advises against buying physical gold in the UAE and taking its to India because the restrictions and duties largely wipe out any cost advantages.

For example, if someone buys Dh10,000 of gold in the UAE and takes it to India, they would lose Dh1,000 in import charges.

The tight rules are certainly enough to put Ms Jethwani off.

“It does not make sense,” she says.

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Published: July 22, 2016 04:00 AM


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