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 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 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 ones 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?
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. Its trading will start in the first or second week
of April.
Is it possible to invest in gold ETF if one hasnt 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?
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 cant be lent because the gold
belongs only to the investor.
How is tax calculated on gold ETF?
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 doesnt apply to mutual funds. If your wealth crosses Rs 15 lakh 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, its 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.