The Hindu Business Line : Fund Talk

Could you advice me on the advantages of investing in Gold ETFs instead of investing in gold itself? Which are the better performing funds in this category?

Partha

Chennai

Gold exchange traded funds (ETFs) allow you to acquire gold in paper form though the stock exchange even in small denominations, at prices that are quite close to international prices for gold. If you are looking at gold as an investment option, the ETF route may be the best way to acquire gold.

When you buy gold in physical form, you have to accumulate it either in the form of jewellery or in the form of bars retailed by banks and jewellers. Both carry certain disadvantages on the price and liquidity aspects.

When you buy gold in jewellery form, there may be compromises on the purity aspect, which may lead to a loss of value at the time of your reselling the gold. Additional costs such as making charges and wastage, usually levied by the jeweller would also not be recoverable at the time of resale.

Acquiring gold in the bar form assures purity, if the bar is hallmarked and of standard weight. However, both banks as well as jewellers usually levy additional charges over the prevailing international price of gold, when they retail it to you in bar form. This may add as much as 10-15 per cent, by way of mark-up, to your cost of acquisition.

Liquidity also is uncertain, as banks do not offer to repurchase the gold bars retailed by them, while jewellers may do so only at a discount. Owning gold in physical form also involves a carrying cost in the form of locker rentals for storing gold and insurance, if any.

In contrast, gold ETFs offer both transparent pricing and better liquidity than physical gold. ETFs initially create a large pool of units, which reflect underlying physical gold exchanged by big investors called ‘authorised participants.’

Once a Gold ETF is launched, these units re listed on the stock exchange and traded much like stocks or units of close end mutual funds. Investors seeking to buy them can execute trades through their broker and ETF units will be automatically credited into a buyer’s demat account. ETFs usually price their units in such a way that each unit of the ETF represents one gram of physical gold.

Once listed, the fund discloses the NAV of the ETF on a daily basis based on the prevailing international prices of gold. As traded prices of ETFs tend to be quite close the NAV, this structure ensures that returns on ETFs closely reflect movements in actual gold prices.

The costs associated with buying and owning an ETF are the entry load of 1.5-2 per cent (only if you buy during the ETF’s launch), brokerage charges of 1 per cent or less (if you buy through exchanges) and the annual recurring expenses associated with the ETF (usually less than 2 per cent).

You can sell your ETF units at any time of your choice through the exchange, just as you would a stock. You may suffer a marginal discount or earn a premium over the prevailing NAV of the units, depending on where the market price is traded, vis-À-vis the ETF’s NAV.

As Gold ETFs are passive products, there may not be too much of a difference in returns between the various options available in the market. Fund houses such as Benchmark, Quantum, Kotak, UTI and Reliance currently offer gold ETFs.

AARATI KRISHNAN

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