Investing in Gold

Investment in Gold has always been happening in India for various reasons such as diversification, holding gold as an asset class, Hedge against inflation, Low volatility (not really in the recent past if you look at the price movement of gold) as compared to equities and finally acts as a store of value which can be pledged or sold in the case of dire straits.

Primarily the investment in gold in the past has been in the form of jewellery (worst form of investment in gold if considered from an investment purpose) or gold bars (of 1 gm, 5 gm, 10 gm or 1 tola etc). Some also Trade in Gold futures (will be discussed in future posts).

However, introduction of Gold exchange traded funds allow investors to invest in gold and hold them in a virtual form rather than physical form thus having significant benefits. These are essentially open ended funds that are listed and traded on exchanges like stocks where you can buy and sell them like stocks through stock brokers and hold them in the demat form. These are designed to provide returns that, before expenses (typically between 1% and 2% of the assets under the management will be considered as the management fee) as, closely correspond to the returns provided by physical Gold. Each unit of the mutual fund is approximately equal to the price of 1 gram of Gold.

What are Advantages of Investing in Gold exchange traded funds ?
• Potentially cheaper to have price exposure to gold price as compared to other available avenues such as jeweler, bank
• Quick and convenient dealing through demat account
• No storage & security issues for investors
• Transparent pricing as it is linked to international gold prices and traded in stock exchanges
• Taxation of gains is similar to that of Non equity Mutual Fund
• Listed and traded on stock exchange just like a stock therefore leading to easy buying/selling
• 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 1 Gram of Gold

Schemes such as UTI MUTUAL FUND - UTI GOLD EXCHANGE TRADED FUND (NSE Code - GOLDSHARE) and BENCHMARK MUTUAL FUND - GOLD BENCHMARK EXCHANGE TRADED SCHEME (GNSE Code - OLDBEES) are some of the Gold exchange traded funds that have been launched some time ago.

Schemes such as Kotak Gold ETF are soon going to be launched.

Since the Gold exchanged Mutual Fund is classified as a Mutual Fund, investor need not pay wealth tax. The scheme will have Non equity Mutual Fund Taxation rules applicable as per current Tax laws, where investor has to pay the tax only after redemption. Typically the factors that affect the performance of the fund will be the following

• Closing price of gold in the London Bullion Market Association AM fixing price on that particular day in US$/ounce.
• Rupee to US dollar value. A rising rupee means that gold gets cheaper.
• Crude prices. Increase in crude prices will normally lead to increase in the gold prices.

Typically gold should constitute upto 5% of the portfolio of an individual's assets.