Monetising gold and investment options

For an average Indian, gold is much more than an avenue for investment. Generally, Indians do not part with family gold/ ornaments as gold has lot of sentimental value. Indian households own around 22,000 tonnes of gold. India imports around 1,000 tonnes a year and more than half of the gold imported is used for wedding/ornaments. Yearly, around 600 tonnes are used in jewellery production.

Some Indians consider gold as a financial asset and keep a part of their savings as investment in gold. Through the Union Budget, the Government of India has taken steps for gold monetisation with objectives of mobilising gold held by households/ institutions, reducing reliance on imports and provide fillip to gems/ jewellery sector by making gold available as raw material on loan from banks.

Several attempts were made earlier also to monetise the idle gold. Individuals have different avenues to invest in gold. Some invests in physical gold - coins/ biscuits - for converting into ornaments in future or to sell when price goes up.

Today, gold prices in India depend upon international prices, exchange rate of rupee and import duties levied by the government.

To avoid the risk of holding physical gold, a few invest in gold ETF (exchange-traded products) and the "gold" in held in demat form. The ETF value moves with gold price. On account of fall in prices, the amount in gold ETF has come down to Rs 6,323 crore (August, 2015).

Even with a lot of conveniences imbedded with gold ETF, many still prefer physical holding for sentimental value. Gold ETF also attracts tax as made applicable to debt schemes of mutual funds.

The Gold Deposit Scheme (GDS) was launched by banks around 15 years back. The GDS did not pick up. The minimum quantity of gold is high and the return is low. In the SBI (website), the minimum quantity is 500 grams; interest is at 0.75 per cent (for 3 years) and 1 per cent for 4 and 5 years. GDS certificates issued in terms of pure gold contents are transferable.

Option is given to redeem either in gold or equivalent rupee. Loans are provided at 75 per cent of the notional value. The GDS provides exemption from income tax and capital gains tax. While GDS is fine with temples/institutions, individuals do not prefer GDS since conversion of ornaments to pure gold for investing in GDS will result in heavy loss (5 to 15 per cent - making charges/ wastage etc). On maturity, if the investor wants to re-convert the gold into ornaments, again he has to spend.

The price risk for the gold deposited is for the banks. Banks can lend gold and generate income. On account of complexities involved, banks do not generally encourage small value gold deposits.

It is reported that the total quantum of gold mobilised by banks under the GDS come
to around 15 tonnes only. Drastic changes are proposed in the GDS. Preliminary purity test is to be done by any of the BIS-certified 350 Hall Marking centres to inform the customers.

Capital gains tax
They would be informed about the approximate amount of pure gold, melting the gold to arrive at the pure gold (fire assay test) and option to be given to the customer at this stage to accept the gold or to deposit, reduction of minimum quantity to 30 grams, payment of interest by banks in terms of gold, option to get back gold or the equivalent rupee, minimum period of one year with roll out option, exemption from capital gains and income tax etc. Banks may be permitted to deposit the gold as a part of CRR/ SLR requirements with the RBI, lend the gold to jewellers etc.

Investor's preference of the new GDS may depend upon the interest rates. The critical issue is the price risk of the gold with the banks and return banks can expect from the gold they mobilise.

The Sovereign Gold Bonds to be issued by the RBI to resident Indian entities in the denominations of 2, 5, 10 grams (with a cap of 500 grams per person per year) may fetch interest rate linked to international rate for gold borrowing - around 2 or 3 per cent - in gold terms.

Liquidity is ensured to the investors as gold loans can be taken on these bonds, can be sold or traded on commodity exchanges. On completion of the tenure (five to seven years), the investor can receive the equivalent of the face value of gold in rupee terms. Banks/ NBFCs/ post offices may collect money or redeem bonds on behalf of government.
The price risk (price of gold in dollar or rupee exchange risk) is not for the investor and may be for RBI/government. One has to wait for the final guidelines for taxation of interest earned and for capital gains tax, which may be as for applicable for physical gold.
Around 300 tonnes of physical bars and coins are purchased yearly by Indians for investment purpose and a part may get diverted in these bonds. Those who intend to invest in gold, sovereign gold bond will provide better opportunity. 

BY K N V PRABHU
(The writer teaches banking at ICICI Manipal Academy (IMA), Bengaluru)

Term Life insurance policies provide worldwide coverage

In Life insurance whether Term insurance has worldwide coverage, This is all our discussion describes below:

However, while underwriting, insurers make an assessment of risk. Generally, if you have travelled to certain high-risk zones, they will reject your application.

My view is that you should give the information asked for and no more. If you have not travelled to a high-risk country before, find an insurer that does not ask for future travel plans in the application form. Once the insurance is issued, it has worldwide cover.

Does a term plan have worldwide coverage?

—R. Kurien

Term insurance has worldwide coverage. However, while underwriting, insurers make an assessment of risk. Generally, if you have travelled to certain high-risk zones, they will reject your application. My view is that you should give the information asked for and no more. If you have not travelled to a high-risk country before, find an insurer that does not ask for future travel plans in the application form. Once the insurance is issued, it has worldwide cover.

I want to extend my life insurance cover to include my daughter. Would it be better to get another plan instead?

—Sangeeta Singh

Yes, buy a separate plan for your daughter. Only a few insurance companies offer a dual life insurance plan. Such plans are mostly limited to you and your spouse.

However, if your intention is that your daughter should be the beneficiary if you die, then add her as a nominee in the insurance.

What are the important details required to be submitted if I wish to change or add another nominee?

—Arvind Patel

When you want to change or add a nominee, you need to provide the following details to the insurance company: name, share in insurance benefit, relationship, age and address of the nominee. Insurers may also ask for proof to support all the facts stated above, and require a nomination form to be filled up. If the nominee is a minor, the insurer would require you to declare the name of an appointee for the minor.

I have lost my policy docket. What should I do?

—Sushma Singh

If you have lost or misplaced your policy, apply for a duplicate policy. The rights and privileges of a duplicate policy are the same as that of the original. The process to obtain this may vary by insurer but the broad process is as follows. First, the insured needs to file an advertisement in a daily newspaper about the loss of policy. The insured then needs to submit a copy of the newspaper with the advertisement along with an application for duplicate policy issuance, an indemnity bond, charges for preparation of a duplicate policy and stamp fees.

In some cases, insurers waive off the requirement of a newspaper advertisement, for instance, when loss is due to theft. In this case, a first information report (FIR) lodged may be required.

My uncle died about three years ago but we did not apply to the insurer for a claim. Can we do that now?

—Anando B.

You should immediately apply for the death benefit. Please submit documents, including death certificate and copies of the insurance policy. The insurer will ask the reason for the delay. Give them the reason, which could be administrative oversight or that the documents were untraced or that the family was in trauma

Friends, I hope you have a oversight on term plans that are provided by insurance companies.