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Wednesday, December 31, 2008

GOLD ETF - A SMART WAY TO INVEST IN GOLD

The 2008-09 budget decision to introduce Gold Exchange Traded Funds with `gold' as the underlying asset will facilitate buying and selling of the yellow metal, even in the smallest of units. This is a welcome move that signifies India is catching up with developed markets.


What is ETF?

ETF is normally a MF scheme that is listed on stock exchange & traded like common stock. The traded price of the ETF units on the stock exchange reflects, before expense, the value per unit of underlying assets of the fund. They enable investors to gain exposure to indices or underlying assets at a lower cost than any other form of investing.


Investing in Gold

Gold is one of the most widely held precious metal, appeal to almost all kinds of investors. It provides investors a different asset class to diversify their portfolio and a hedge against inflation. It is also used by Central banks as a substitute of currency to hedge against financial & credit risk. Apart from this gold is also used for jewellery and some industrial purpose.



Gold Demand pattern of Gold in India

  • In 2005, India accounted for 22% of global gold jewellery demand and 35% of global retail investment demand.
  • India holds 10 % of world gold stock (15000 Tonnes)
  • Jewellery accounts for 60% of total demand in India and gold coins & crude gold accounts for 30-35% of total demand.


What is GOLD ETF?

Gold ETFs represent an easy way to gain exposure to the gold price, without the hassle of buying gold directly. Investors can buy or sell units in the Gold ETF, with each unit representing a certain gram's of gold held by the fund. Though investors can buy Gold ETF units from the fund house during the initial offer period, subsequent transactions will have to be routed through the stock exchanges, where the units will be listed and traded at NAV-based prices. Like other mutual fund products, Gold ETFs will publish their NAV on a periodic basis and this would be linked to the prevailing gold price. Under the present regulations, Gold ETFs in India will track London gold prices expressed in US dollars, and will represent 'standard' gold of 99.5% purity.


GOLD ETF versus Physical Gold

S. No.

Parameter

Physical Gold

Gold ETF

1

Purchasing Gold

Physical

Dematerialized

2

Premium for Purchase

High/Very High

N.A.

3

Making charges

High/Very High

None

4

Quantity that Can be purchased

Any amount/coins From 5gm

Multiple of 1gm

5

Impurity Risk

High/Low

Nil

6

Storage

Locker

Demat A/c

7

Risk of theft

High

No Risk

8

Liquidity

Low

High

Why invest in GOLD ETF?

  1. GOLD ETF will provide a screen-based platform to investors to accumulate quality gold in small lots. For example, a father wanting to gift gold to his daughter need not but the metal (or the jewellery) only when he intends to gift her, instead he can start buying in small lots.
  1. Gold has proven to be a good hedge against inflation and maintained a long term value. Gold is not highly correlated with other financial assets such as stocks, currency and bonds, which are directly affected by the country's economy.
  1. It offers a good diversification and reduces overall risk/volatility of investments.
  1. Gold has a ready & wide acceptability. Hence, exchanging it for cash or raising money against gold is easier.
  1. Gold ETF backed by the standard hallmark quality can provide a safe & liquid investment avenue through price volatility in the short term cannot be eliminated.

Disadvantage of investing in GOLD ETF

One, a badly timed purchase can expose the investor to the risk of value erosion, if gold process decline. Second returns on Gold ETFs may be lower than those on physical gold by virtue of management fees, transaction costs and other operational expenses levied by the fund house on the fund's NAV. Third, if the ETF units are not actively traded in the stock market, you may not be in a position to exit your holdings at the time or price of your choice.


Tax Implication of investing in Gold ETF

S. No.

Tax

Gold ETF

1

Wealth Tax

Not Applicable

2

Short Term Capital Gain Tax

Applicable Before 1 year

3

Long Term Capital Gain Tax

Applicable After 1 year

Who can invest in GOLD ETF?

  1. An Individual Resident/ Non Resident Indian.
  1. A Non-Individual: - Firm, HUF, Banks, Trusts, Companies etc.

An investor who applies for GOLD ETF should have a Demat Account

source: Investment Monitor (Magazine)

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