INDIAN investors who would like to add gold to their portfolio have been faced with a Hobson's choice so far.
Either you invest in jewellery and sacrifice a significant portion of your investment to variations in caratage, wastage and making charges, or you buy gold bars from banks and stack them up in your bank locker.
Options such as gold certificates, accumulation plans, coins and shares of gold mining companies, which serve as a proxy for investing in gold in the developed markets, do not exist here. This is why the Budget's proposal to flag off gold ETFs is important. It may allow you to add gold investments to your portfolio, without any of these encumbrances.
Gold Exchange Traded Funds are a relatively recent phenomenon even in the American markets with the first Gold ETF - StreetTracks Gold making its debut in the New York Stock Exchange in November 2004. Each unit of the StreetTracks Gold ETF represents one-tenth an ounce of gold.
Gold ETFs work much like the exchange-traded funds, which track stock market indices.
The fund house which floats the ETF issues a limited number of units, which are backed by an equivalent value of gold held in bar or bullion form. The physical gold is held by a custodian, on behalf of the fund house. Once launched, the ETF is listed on the stock exchanges. Investors can buy or sell ETF units on the stock exchanges at the traded prices.
In India, the ETF structure may be particularly suitable for a gold fund because of the unavailability of a highly liquid, organised market for gold or gold-backed securities.