Gold is among the most possessed asset by Indian households,mainly in the form of jewellery. The run in gold prices in the last couple of years,and particularly this year,surpasses the returns provided by any other asset class. This has created an attraction for gold,mainly as an investment for asset allocation purposes,in addition to serving its usefulness for occasions and daily utility. While jewellery is seen to perform dual function used for aesthetic purpose and investment in times of crisis it may not be the most preferred form of investment. At the time of sale,one does not usually get the full price of gold. If you're looking at gold purely from an investment perspective (asset allocation),it may well be worth to explore gold exchange-traded funds (ETFs) a product introduced in 2007. What is Gold ETF? Gold ETF,also known as paper gold,is an open-ended mutual fund scheme that invests money in standard gold bullion that has 99.5 per cent purity. Investors in gold ETF will have their investment in the form of units of the scheme that are listed on stock exchanges. Each unit of the investors holding will typically represent one gram of gold. However,there are ETFs with lower denomination too. For instance,one unit of Quantum gold ETF is 0.5 grams. How safe is it? A custodian is appointed by the mutual fund company for safe keeping of the gold bought on behalf of the investors. The quality of the gold will be 99.5 per cent pure, which in other words means that it is 24 carat gold. The gold held with the custodian cannot be lent and will be fully insured. How are the returns? Gold ETFs are passively managed funds and provide returns that closely mirror the returns provided by gold in the spot market. Hence the returns are more or less similar to that of physical gold. Thus when the price of gold increases,the price of the ETF is also expected to go up by the same amount,and vice versa. Gold ETF provides you an opportunity to invest in gold without taking physical delivery of gold. How to buy? Gold ETFs are traded on the stock exchange and today most of them trade on the National Stock exchange (NSE). They are held in the dematerialised form just like equities. Hence in order to purchase gold ETFs,you need to have a demat account and also registration with a broker who is a member of the stock exchange. Some of the AMCs that offer gold ETFs currently in the market include Gold BeEs,Kotak,Quantum,Reliance and UTI Mutual Fund. What are the charges? Demat account and trading account with the broker will have some annual charges. In addition,for every transaction,investors will have to pay brokerage fee that ranges between 0.4 per cent and 0.6 per cent of the transaction value. The fund also charges an expense ratio for managing the fund that ranges from 1 to 2.5 per cent. What is the tax treatment? Investments in gold ETFs are eligible for tax treatments similar to that in of a debt mutual fund. Investment held for less than a year,attracts short-term capital gain tax and the tax rate depends on the tax slab the investor falls in. Investment held for more than a year attracts long-term capital gains tax and is taxed at 20 per cent with indexation benefit or 10 per cent without indexation benefit,whichever is less. Investment in Gold ETFs does not attract wealth tax because the investor does not hold gold in the physical form. •Advantages Allows small denomination purchase. Retail investors,who want exposure to gold in small amounts,can opt for gold ETFs. It allows investors to buy one unit,which is buying 0.5 - 1 gram of gold depending on the scheme. Liquidity. Gold ETFs are can be bought and sold any time during the trading hours like equities at the price quoted on the exchange. This makes it a liquid investment instrument. Transparent pricing. The price of ETFs is quoted on the stock exchange and there is a bid or ask during market hours enabling you to buy or sell at market prices. Thus you do not have to pay a premium while you purchase or a sell at a discount as in the case of jewellery or even sometimes coins and bars. Safety. Gold ETFs is essentially buying gold in paper form and therefore eliminates the need for safe keeping. The custodian appointed by the mutual fund has the responsibility of taking care of the gold. Purity. Mutual funds are governed by capital market regulator SEBI and regulations mandate that the the purity of underlying gold in gold ETFs must be 99.5 per cent fineness and above. This spares investors from the trouble of finding a reliable source to buy gold. Tax efficient. Gold ETFs do not attract wealth tax. Besides,the investment is categorised as long term if it held for more than a year unlike physical gold where the period is three years. Disadvantages SIP (systematic investment plan) option is not available with gold ETFs. So if you want to make monthly investments,you need to do it manually by buying units through a stock broker. The units will then get credited to your demat account. Also investors need to pay brokerage,demat and trading account charges and expenses. This may impact overall returns. As an investment option in gold,gold ETFs are more attractive than physical gold or commodity or gold sold by banks as it does not attract any wealth tax. Besides,investors do not have to worry about the quality,safety,transparency in price and resale value. From a tax perspective too,gold ETFs are attractive. However,ensure that you do not go overboard with your investments in this asset class. Invest only up to 10 per cent of your assets in this class. The writer is chief executive officer at the BankBazaar.com
