Slowly-growing prices appear to have made gold a dull choice as an investment. But protection from depreciation enables it to add stability to any portfolio. And a burst of gold-related savings schemes has raised new opportunities for capitalising on your precious assets.

By Radhika Dhawan

Colloquially, when you dig for gold, you use your hands-and nose. Ironically, an investment in gold delivers similar returns. Over the past 18 years, from April, 1981 to March, 1999, the price of gold has appreciated by 5.36 per cent per annum compounded in rupee terms. What that means is that if you, as an investor, had put your money in a savings bank account, your returns would have just about matched those from the yellow metal.

Look ahead. Assuming that the growth-rate remains at 5.50 per cent over the next 20 years-an optimistic assumption-an investment of Rs 4,000 in 10 gm will grow into Rs 11,671. At the very least, a similar investment in a risk-free government bond, which delivers 10 per cent, would fetch the investor Rs 26,910 at the end of 20 years. Admits Makhanlal Damani, 63, President, Bombay Bullion Association: ''Gold can hardly be counted on as a profitable investment.''

The world has changed its outlook on the traditional form of investment. In recent years, the price of gold has been falling steadily-from Rs 14,000 per ounce in 1995-96 to Rs 12,000 per ounce in 1996-97, to under Rs 12,000 in the first quarter of 1997-98-before finally settling at Rs 12,500 by the fourth quarter. Don't expect any reversals. For, gold-the least liquid of reserves-has fallen out of favour with the central banks worldwide. At least 5 major governments-Argentina, Australia, Belgium, Canada, and The Netherlands-have been selling gold to improve the quality of their reserves.

What's the alternative? Ironically, India imports more gold than oil. No wonder the declared gold assets in the country are $90 billion (Rs 3,78,000 crore). And aconservative estimate values the total amount of gold in the country at $135 billion (Rs 5,67,000 crore). You already know it: the Indian psyche demands the yellow metal. Some 30 per cent of the country's savings are invested in gold. But if it delivers such poor returns, why? That is partly because there was a dearth of investment avenues in the past. Investments in gold are treated as a capital-preservation tool and as the inflation-hedge component in a portfolio. Returns are not a priority. Although gold does not have any industrial value, it does have a high storage value, and its quality remains untouched by time. Says A.N. Shanbhag, 64, the investment advisor: ''An investment in gold is no investment at all. It is consumption.''

Quantifies Anil Sahgal, 33, Vice-President, Dundee Mutual Fund: ''At the end of the day, gold is a low-risk investment for which a dollar value is always available. It will continue to have some utility in the country.'' That's correct, but some return is better than no return at all. After all, there are other investment options which offer reasonable, risk-free returns-and negate physical custody. This, immediately, frees the investor from the hassles and security-costs of storing gold as well as of ascertaining its quality. However, from the forms of investments being talked about, there is not much to speak of for the investor.

GOLD-DENOMINATED MUTUAL FUNDS. The Unit Trust of India and Dundee Mutual Fund are expected to launch gold-denominated funds within the year. Such a fund will function like any other mutual fund, and will be tradable. The returns generated will have 2 components: one is the returns that the fund will get by monetising the gold and investing it, which will be the fixed regular return. The second will be the underlying value of the gold according to rupee-dollar movements and gold price-movements, which will be reflected in the Net Asset Value. The expected returns are between 3 and 5 per cent. Says Dundee Mutual Funds' Sahgal: ''It is a way of preserving capital and getting regular returns.''

He has a point. This form of investment could get some zip when the government allows mutual funds to invest in the international markets. That would allow the fund to invest in the equities of gold-mining companies. Their shares move up exponentially when the price of gold goes up as the valuation of the shares is on the basis of discounted cash-flows. However, until that happens, the scope is limited to India. Admits Value Research's Kumar: ''There is no active market for trading in precious metals in this country.''

GOLD DEPOSIT SCHEME. In an attempt to mobilise the idle gold savings in households across the country, UB 99 announced a Gold Deposit Scheme. According to its terms, the banks will be allowed to accept physical deposits of gold, and issue interest-bearing certificates or bonds in return, which can be reclaimed for gold on maturity. Union Finance Minister Yashwant Sinha has thrown in a host of tax-sops to attract investors. The value of the gold deposited and the interest earned on it will be exempt from the wealth tax. Further, any capital gains made on these gold bonds through trading or at redemption will be exempt from the capital gains tax. The expected returns are 2.75 per cent on a 3-year deposit, 3.50 per cent on a 7-year deposit, and an intermediate 3.25 per cent on a 5-year deposit. Certain banks, like the State Bank of India, also offer benefits like rupee loans of upto 90 per cent of the gold deposited, with the interest-rate linked to the Prime Lending Rate.

On the one hand, the returns are guaranteed and secure. The government is considering the possibility of allowing the banks to hedge their risks abroad due to the lack of a hedging mechanism in the country. However, despite the carrots, we are cynical about the takeoff of the scheme. Reasons range from the lack of confidence in the efficacy of the banks' implementation skills to concerns about who will bear the hedging cost. Points out H.G. Desai, 42, Partner, A.V. Rajwade & Co.: ''The banks are likely to be reluctant to underwrite the price-risk themselves.'' And, while it will be a tradable instrument, liquidity will be limited due to the lack of an active market. As things stand, the inherent malleability and ductility of gold will have to come into play if it has to add a significant sheen to your portfolio.

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