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Gold Exchange Traded Funds - ETFs



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.

Brief history

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.

Difference between Gold ETFs & Mutual Funds
Disparate Asset Classes

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.

Returns attainable

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.

Nature of funds

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.

Benefits of trading in Gold ETFs

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.

Why should an investor invest in Gold ETF?

  • There is nothing to worry on adulteration
  • Gold provides diversification to the portfolio
  • Gold is considered as a Global Asset Class
  • Gold is used as a Hedge against Inflation
  • Gold is considered to be less volatile compared to equities
  • Held in Electronic Form
  • '
  • Store of value
  • Extremely Liquid

Advantages of Investing in Gold ETFs

  • Potentially cheaper to have price exposure to gold price as compared to other available avenues
  • Quick and convenient dealing through demat account
  • No storage and security issue for investors
  • Transparent pricing
  • Taxation of Mutual Fund
  • Can be traded on stock exchange like buying / selling a stock
  • Ideal for retail investor as minimum lot size to trade is one unit on secondary market
  • NAV of a unit will track price of approximately ½ or 1 gram of gold
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
5 Impurity Risk High Nil Nil
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
13 Wealth Tax Yes Yes No
14 Long Term Capital Gains Tax Only after 3 years Only after 3 years After 1 year

Tax treatment of Gold ETF

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.

Risks Involved

  • Mutual Funds and Securities investments are subject to market risks and there can be no assurance or guarantee that the objective of the scheme will be achieved.
  • As with any investment in securities, the NAV (Net Asset Value) of the units issued under the ETF can go up or down depending on the factors and forces affecting the Bullion Market, Capital Market and Money Market.
  • The Past Performance of the fund house issuing the ETF should not be construed for the future performance of the fund. It might not provide a basis of comparison with other investments.
  • The name of the Gold ETF doesn’t indicate the quality of the scheme or its future prospects and the returns. Investors should study the terms of offer carefully and consult their investment advisor before investing the scheme.
  • ETFs are a new concept in India compared to other parts of the world.
  • The sponsor of the mutual fund is not responsible or liable for any loss or shortfall resulting from the operation of the fund beyond the initial contribution made by it of an amount of Rs 1 Lac towards setting up of the Mutual Fund.
  • Investors are not offered any guaranteed or assured returns.
  • The scheme NAV will react to the Bullion Market movements. The investor could lose money over short periods due to fluctuation in the schemes NAV in response to factors such as economic and political developments, changes in interest rates and perceived trends in Bullion market movements and over longer periods during market downturns.

Gold ETFs available in India

  • Benchmark Mutual Fund - Gold Benchmark Exchange Traded Scheme (NSE Symbol: GOLDBEES)
  • Kotak Mutual Fund - Gold Exchange Traded Fund (NSE Symbol: KOTAKGOLD)
  • UTI Mutual Fund - UTI Gold Exchange Traded Fund (NSE Symbol: GOLDSHARE)
  • Reliance Mutual Fund - Gold Exchange Traded Fund (NSE Symbol: RELGOLD)
  • Quantum Gold Fund - Exchange Traded Fund (ETF) (NSE Symbol: QGOLDHALF)
Mutual Funds
Mutual Funds