Young Investor

The ETF route to investing in gold

BL RESEARCH BUREAU | Updated on August 13, 2011 Published on August 13, 2011


Allured by the rising price of gold and lacklustre performance of the equities, many investors are looking at gold as an option to park their savings. If you are also looking to add some glitter to your investments, here's a lowdown on how to go about it.

While the traditional choice of buying gold jewellery is an option, it is not recommended for an investor whose prime motive is to make returns. Charges in craftsmanship while buying and the loss on ‘wastage' charges on resale eat into price appreciation of the metal and lower returns. Stacking up gold as coins is also not advisable given that it involves expenses of safe-keeping it. Instead, gold investors can consider gold exchange traded funds. So, how does one get started?

Gold exchange traded fund

Gold exchange traded funds are the exchange-listed mutual fund units of gold. These function like normal mutual funds but for the fact that they can be traded on the floor of a stock exchange. You just need to have a demat and trading account for that. You can use the same demat that you use for stock transactions for this purpose.

Interested investors can buy units of a gold-ETF from the open market. Each unit represents one gram of gold (but for the case of Quantum gold ETF where one unit represents 0.5 gram). You can track your units' value through the quote on the stock exchange as most gold-ETFs are listed both in NSE and BSE; the fund houses publish NAVs too periodically.

The gold in which these funds invest represents standard gold of 99.9 per cent purity. These funds track London gold price expressed in dollars. You can get the benefit of price appreciation in gold here without having to fret over its safe keeping and storage charges. There are currently 12 exchange listed gold ETFs in India, the largest (and most liquid) being Benchmark Mutual Fund's GoldBeES. This ETF sees an intraday volume of around 1.5-2 lakh units.

What are the charges?

Of course, there are charges here too. While buying a gold-ETF, you will need to pay both the stock broker and the fund house under consideration. Brokers charge a flat fee for the demat account and a fee on each trade executed through their trade platform (this charge will not be more than what you pay for equity trades). To the mutual fund house, you will have to pay fund management charge. But for these two charges, there is no other expense in the case of a gold-ETF investment.

Gain on investment in gold-ETF is treated in the same way as that of a debt mutual fund, where long-term capital gains are not taxed and short-term capital gains are added to your total income and taxed as per the slab in which you fall.

Other options

Recently some fund-of-fund options too have come up for investing in gold. These are mutual funds that invest in gold-ETF schemes. Investors who do not intend to open a demat account specifically for investing in gold can choose this option. Reliance Mutual Fund and Kotak Mutual Fund have fund-of-fund options to invest in gold. These funds offer systematic investment options too. The monthly SIP starts from as low as Rs 100 in the case of Reliance Gold Fund.

Published on August 13, 2011
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