The Hindu Business Line : Fund Talk

Gold exchange traded funds (ETFs) are open-ended mutual fund schemes that are traded on the stock exchanges. ETFs passively mimic a particular asset, this could be a basket of stocks in an index such as Sensex or Nifty, or a commodity like gold. They can be bought and sold in the stock exchanges, unlike a regular mutual fund. While Benchmark Mutual and UTI Mutual have launched Gold ETFs, a few other fund-houses have lined up similar products.

Objective: Gold ETFs simply allow you to hold gold in dematerialised form. The schemes currently offered seek to provide returns (before expenses) that are close to the returns provided by physical gold. Each unit of the scheme is backed by physical gold that would held by a custodian chosen by the fund. Normally, the fund receives physical gold from the authorised participants (APs) against the Gold ETF units, subject to various stipulations as to the quantity and quality of the precious metal, and so on. Such APs can also buy and redeem gold units from the fund as well as the secondary market. This is expected to keep the price of units in the secondary market close to the fund's NAV and the spot price of gold, and also ensure liquidity of units.

Gold held by the scheme is valued in US dollars at prices fixed by the London Bullion Market Association. Gold ETFs are passively managed as they only try to mirror the performance of the gold prices. Investors need to keep in mind that the objective of the scheme is, as far as possible, to deliver returns that are equal to those generated by gold and not outperform it.

How to buy

Investors need a demat account and a share trading account with a broker since ETFs can only be bought or sold in dematerialised form. Each unit of an ETF represents 1 gram of gold. These can be bought either during the NFO of a Gold ETF or in the secondary market (at present, the NSE).

The recent launches came with an entry load and a minimum investment amount during the NFO. If you buy in the secondary market, you may be able to buy small quantities, as required. While there is no entry load you would still incur brokerage charges similar to that of buying a share. The settlement would also be no different from that of shares. Although there is no entry load in the secondary market, one cannot conclude that buying through an NFO is expensive. The actual price of the units relative to NAV, brokerage charges, availability of units and the price of gold would determine the cost of your investment in the secondary market.

Funds such as Gold BeEs, from Benchmark, allow large investors to purchase units from the fund even after the NFO. Known as creation of units, this would require such investors to buy a large number of units against the minimum stipulated quantity of gold they bring. This may also carry an entry load, as stipulated by the fund. The funds will also incur annual recurring expenses (adjusted in the NAV), which will be within the limit prescribed by SEBI. As for redemption, investors have to simply sell the units in the secondary market. Unlike authorised participants, regular investors do not get any physical gold on sale of units.

Why Gold ETFs?

Investing in Gold ETFs gives you the advantages of investing in physical gold without the typical drawbacks such as storage, liquidity and purity issues. It also allows investors to hold gold in small denominations, thus providing an investment vehicle for retail investors. Units can also be accumulated periodically to achieve rupee cost averaging.

Gold ETF units are free from wealth tax. Also, being a non-equity scheme, there will be no securities transaction tax when you transact in Gold ETFs. However, investors have dividend distribution tax and capital gains (CG) tax to contend with. While short-term CG tax (within a year) would be at the applicable tax rate for the investor, long-term CG tax would be at 20 per cent with indexation or 10 per cent without indexation plus surcharges.

While gold has traditionally provided a good hedge against inflation, investors need to keep in mind gold/gold ETF is another asset class to provide diversification. Gold ETFs cannot be expected to beat equity returns over a long term. If you are looking at gold as an addition to your portfolio, gold ETFs are a good option to take that exposure.

Queries may be e-mailed to mf@thehindu.co.in, or sent by post to Business Line, 859- 860, Anna Salai, Chennai 600002.

Vidya Bala

More Stories on : Investments | Mutual Funds | Gold & Silver

Article E-Mail :: Comment :: Syndication :: Printer Friendly Page