Golden funds: Better than gold!

Gold is being increasingly recognised as an asset class worth investing in.

Now you can buy physical gold by investing in Gold Exchange Traded Funds (ETF) launched by mutual funds. When you buy units, you in a way buy gold worth that amount and deposit it with a custodian.

The Net Asset Value (NAV) of gold is decided by gold prices. Each unit represents one gram of gold. These funds have been listed on the Bombay Stock Exchange (BSE) and the National Stock Exchange (NSE), and it's possible to buy and sell these units just like shares through a demat account.

Gold exchange traded funds save charges on locker facilities and insurance. As far as extra expenses related to gold ETFs are concerned, it is not likely to exceed 2.25%. Recently launched funds charge an extra 1%. They are also exempt from wealth tax. Gold ETFs invest in imported gold that is 99.9% pure.

Recently, gold exchange traded funds have been launched by UTI Mutual funds and gold mutual funds in the market. Many other mutual fund companies have plans to launch similar funds in the near future.

People who might have otherwise bought physical gold coins or bars, but wanted the same thing with more convenience, are buying physical gold by investing in gold ETF. Gold ETFs have performed well in the past four years in other countries. Until 2003, it was hardly recognised as an asset class. In the past four years, 700 tonne gold worth 13 billion dollars has been invested in gold ETFs.

Earlier, pension funds, hedge funds etc. did not invest in gold and never even thought of investing in them as an asset class.

Now with the launch of gold ETFs, more people have started investing in gold ETFs, which is being considered an efficient way to invest in gold. In fact, bullion traders who earlier kept physical gold have also shifted to gold exchange traded funds.

Rajesh Bhojani, president, UTI Mutual Fund gives you insights on whether Gold ETFs make a worthy investment.

Will gold ETF finally become part of the Indian investors' portfolio?

India is the biggest gold market in the world. Last year, gold worth Rs 70,000 crore (Rs 700 billion) was traded in India. However, the demand is now shifting from jewellery towards investment. Five years ago, demand for jewellery was 90% and demand for gold as an investment only 10% of the total trade. Investment in gold has picked up and has reached 30%.

Gold worth Rs 20,000 crore (Rs 200 billion) per annum is being sold in the form of coins, biscuits or bars, while a lot of people are buying from banks. Banks have started selling gold in the past five years. Leading jewelers also sell pure gold. There is an investment demand of Rs 20,000 crore for gold. But when you go to a jeweller or a bank to buy gold coins, you have to pay 5-7% premium.

When you go to a jeweller to sell the gold or to get it converted into jewellery, about 5-10% is cut from the total cost. Therefore, you never get the benefit of appreciation of gold. Now if you want to diversify your portfolio and want to invest in gold you can check out return figures. Gold has given 16% returns in the past five years. So, why not invest in electronic form of gold?

What portion of your portfolio should you put into gold?

Decide the level of exposure to gold in your portfolio on the basis of one's ability to take risk and in keeping with the financial planning. Gold traded funds have low volatility as compared to both equity and bond market.

Despite low volatility, the bond market has given returns at the rate of 16%. Rate of return from gold has exceeded rate of inflation. Therefore, gold should form about 25-30% of your fixed income portfolio.

What is Gold ETF?

-- Arjun Verma, Ahemdabad

ETF offers investors the ability to access the gold in the gold bullion market with each unit representing one gram of gold. The investor is actually buying gold bullion in the form of an exchange-traded security.

Money collected in Gold ETF is kept in the form of the physical gold, which is held in the vaults by the custodian bank and traded on the London bullion exchange.

Gold will now be traded on the National Stock Exchange. It's trading will start in the first or second week of April.

Is it possible to invest in gold ETF if one hasn't invested during initial offer?

Trading in gold is similar to buying shares through a broker. You can see its price on the NSE terminal and place a buy or sell order through a broker. It will be credited to your demat account. No Security Transaction Tax (STT) is applicable on the ETF.

You pay brokerage and service tax.

Does one need a demat account to invest in gold ETF?

Yes.

What are the benefits of investment in gold ETF?

-- Sandli Jha

When you go to a bank or a jeweller to buy gold, you have to pay a certain premium. As a result, returns shrink. A premium of 20% if charged on small coins of five gram each and 5-10% on gold coins weighing more than five grams. When you go to the jewellers to sell the gold, it is taken back on a discounted price. Apart from this, you have to keep your gold in lockers and pay for the locker facility.

Can one buy gold contract by making a margin payment on a commodity exchange, particularly MCX?

Gold is not traded on a commodity exchange. One invests in gold futures. Future prices are different from gold prices. There are several limitations in taking delivery of gold. It is not always possible to get physical delivery of gold.

You only get a physical delivery of gold at a few places. Secondly, it is credited to a separate account and not to your demat account. There is a major difference between gold futures and physical gold. Gold ETF is invested in physical gold, which is kept with the custodian bank and can't be lent because the gold belongs only to the investor.

How is tax calculated on gold ETF?

-- Chandan Diwedi

There are more tax benefits on gold ETF as compared to physical gold. Capital gains tax calculations are similar to tax calculations on bond funds. When you invest in physical gold, long-term capital gains tax is levied after three years. In case of gold ETF, which is a mutual fund, long-term capital gains tax is levied one year after purchase.

You also get the benefit of indexation. But when you keep physical gold, you have to pay wealth tax, which doesn't apply to mutual funds. If your wealth crosses Rs 15 lakh (Rs 1.5 billion) in a year, you have to pay 1% as wealth tax. Besides this, you save on the STT (Security Transaction Tax), which you have to pay on other securities in the secondary market.

What are the benefits of investing in gold?

Worldwide, the government and individuals keep gold. Many governments move forward and would want to keep their forex reserves in gold. Developed countries such as USA and UK keep 60-70% of their reserves in gold.

But developing countries like India, Brazil, Russia, have only 1-2% of their reserves in gold. As the US dollar is becoming volatile, it's deficit in US is growing and the US dollar, according to economists, will grow weak.

Many developing countries are now thinking of keeping more forex reserves in gold in order to prevent impact on their reserves due to volatility. So, the governments will buy more gold in the future. Suppose there's a war or a big currency crisis, like the one in 1997-98 when the currencies of strong economies like Singapore, Malaysia depreciated by 30-40%

While it is certain that currency gets depleted in case of a currency crisis, stock market and bond markets also get depleted.

Gold is an investment option, which can stand against the tide.

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