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Gold ETFs provides investors a means of participating in the gold bullion market without the necessity of taking physical delivery of gold, and to buy and sell that participation through the trading of a security on stock exchange. Gold ETF would be a passive investment; so, when gold prices move up, the ETF appreciates and when gold prices move down, the ETF loses value. Gold ETF provides return that before expenses intimately corresponds to the returns provided by physical gold. Each unit is approximately equal to price of 1 gram gold. But, there are Gold ETFs which also provide a unit which is approximately equal to the price of ½ gram of gold.
The first proposal of a gold exchange traded fund was initiated by an Indian company called Benchmark Asset Management; a proposal was launched with the SEBI (Securities Exchange Board of India) in 2002. This proposal was not approved at that time.
The Australia Stock Exchange was the first to launch a gold exchange traded fund in 2003 by Gold Bullion Securities under the symbol ‘GOLD’. This fund was fully backed, insured and deposited by gold bullion.
It is the nature of asset classes which differentiate gold ETFs and mutual funds from each other. While former falls under the category of commodities, later comes under equity category. In Gold Etfs investor is vested with the opportunity, to invest in units of gold, which are traded on exchange as single stock. The units issued under the scheme represent the value of gold held in scheme. However in case of mutual funds, fund mangers invest in equity and equity related securities of gold mining companies. Since gold mining companies are not listed on Indian stock exchanges, the gold mutual funds invest in world gold funds that invest in gold mining companies across the world.
Basic motive behind any investment is to gain high returns. The world gold fund has given absolute returns of 31.9 per cent in the period since its inception in August 2007 to July 2008. Most financial advisors advise that investment in gold must be made for the purpose of diversification and at any point in time, about 10-15 per cent of your assets must be invested in gold.
Basic aim of both the funds is another important point which differentiates both the funds from each other. “The fund simply buys and holds gold on behalf of the investor without actively managing it. The aim is to give returns as close as possible, post-expenses, to that given for gold as a commodity,” however when investing in a mutual fund, the investor can rely on the expertise of a fund manager who indulges in active portfolio management and is able to make crucial decisions regarding selecting stocks of gold companies.
In ETf’s investors have the opportunity of buying as less as 1 unit on the exchange. Investors don’t have to pay entry or exit load and expenses on brokerage are less. Here gold etf’s score over mutual funds as in case of later investor has to bear defined load structure, entry and exit loads and other expenses.
IF you take a look at gold prices in the past few months, they have been moving in just one direction that is upwards. From Rs 10, 650 for 10 grams last January 2008, the price has moved to more than Rs15,000 today. Gold price is at a seven month high and is up by 10 per cent since January this year. The World Gold Council reports that global demand was up by 4 per cent in 2008. Gold and stock markets have negative correlation, which can be witnessed in the current scenario where volatility in stock markets has led to sky rocketing gold prices. In 2009 itself Gold ETFs have outperformed gold mutual funds. ETFs have given 29 per cent returns in 2008 and over 8 per cent till now in 2009. In this current financial turmoil investing in shining yellow metal turns out to be the safest bet.
|SL No||Parameter||Jeweller||Bank||Gold ETF|
|1||How Gold is held||Physical(Bars/Coins)||Physical(Bars/Coins)||Dematerialized (Electronic Form)|
|2||Pricing||Differs from one to another. Neither transparent nor standard.||Differs from bank to bank. Not Standard.||Linked to International Gold Prices and very transparent.|
|3||Buying Premium above gold price||Likely to be more||Likely to be more||Likely to be less|
|4||Making Charges||Charges are Incurred||Charges are Incurred||No Charges are Incurred|
|6||Storage Requirement||Locker / Safe||Locker / Safe||Demat Account|
|7||Security of Asset||Investor is Responsible||Investor is Responsible||Fund House takes the responsibility|
|8||Resale||Conditional and Uneconomical||Banks do not buy Back||At Secondary Market Prices|
|9||Convenience in Buying / Selling||Less convenient,as Gold needs to be moved physically||Less convenient, as Gold needs to be moved physically||More Convenient, as held in electronic form under the demat account|
|10||Quantity to Buy /Sell||Available in standard denomination||Available in standard denomination||Minimum is ½ or 1 gram according to the fund|
|11||Bid Ask Spread||Very High||Can’t Sell Back||Very Low|
|12||Risk of Theft||Yes, possible||Yes, possible||No, Not possible|
|14||Long Term Capital Gains Tax||Only after 3 years||Only after 3 years||After 1 year|
The Gold ETF is classified under mutual fund and will be taxed as per non equity mutual fund taxation rules. Investor investing in Gold ETF need not pay wealth tax. Investor has to pay taxes after redemption as per the tax laws applicable for non equity mutual fund. But, when the Gold ETF is redeemed for physical gold the taxation rules will be similar to that of physical gold.