Original Article On Economic Times
4 Sep, 2007, 1001 hrs IST,Bakul Chugan , TNN
Gold units seem to be better than the real thing. Gold ETFs (exchange-traded funds), with their cost-effective way of acquiring gold and paper mode of trading, seem to be the best form of investing. So if you are planning to buy gold this season not with the intention of making jewellery, but to hold it as an investment, consider a gold ETF.
It works out 15% cheaper than buying gold coins from a bank. So rush to your broker to place an order for units of a gold ETF. If industry experts are to be believed , gold prices may go up by 5-6 % by end of the year itself.
WHAT IS GOLD ETF ?FOR the uninitiated, gold ETFs mutual fund units that are traded on the exchange just like a listed share of a company. During market trading hours, investors can submit buy or sell orders which are executed by the market makers. If investors require cash, they can redeem their ETF units — though they have to incur some cost for redemption.
Gold experts believe this is the opportune time to buy with the festive season kicking in. Historically, gold prices have gone up in the second half of the year. Gold prices, this year, have seen levels as high as Rs 9,820 (February 27, 2007) and as low as Rs 8,610 (July 2, 2007) and are currently trading at the price range of Rs 8,895– Rs 8,900 per 10 gm. This is expected to touch Rs 9,300-Rs 9,400 by the year end, says SSKI (Sharekhan) commodity head Shailendra Kumar. “This is the right time to invest in gold,” he adds.
Gold ETFs have emerged as one of the most cost-effective ways to acquire gold. Not only do they provide ease of trade, but also since they are traded at near market values, the high profit margins of the jewellers and banks are done away with. Globally, investors choose gold ETFs as they are a good hedge against stock market volatility. Not to mention , depreciation of the dollar.
Interestingly, the global demand of ETFs has declined in the second quarter of 2007, after nearly two years. The last decline in the demand for gold ETFs was registered only during the second quarter of 2005. Benchmark MF executive director Rajan Mehta says “globally, gold ETFs are more popular among the institutional investors who booked profits to shift money from gold ETFs to other money market instruments in light of the rising interest rates” .
According to Kotak Commodities head Si Kannan, in India, gold ETFs will take time to establish, as Indians prefer physical gold to the demat form. However, over a longer haul, their demand is slated to go up. “Gold ETFs are here to stay,” he states. The corpus of ETF funds has risen since their launch. While UTI’s Goldshare gained 8%, Benchmark mutual funds’ Goldbees recorded 28% growth in its assets.
While these experts expect a bright future for gold ETFs in India, they also shared a consensus on the fact that gold prices are headed for a rise. While Mr Kannan believes new money to flow in once the subprime worries settle down, Angel Broking commodity head Naveen Mathur anticipates that the volatility in stock markets the world over may impact gold prices in the near future.
GOLD FINGERInvestors can buy gold at near-market price. Variation, if any, is 1-1 .5%. Units can be resold any time on the stock exchange at the trading price on the date of sale.
Resale not subject to tax deducted at source. Holding gold in demat form does not attract wealth tax and the benefit of long-term capital gains accrues at the end of one year. Thus, the tax liability on the gains arising from sale of the units is 20% after one year.
No storage or insurance costs have to be borne by investors. Fund houses charge an expense ratio of 1% per annum on account of administrative and custodian expenses.
Investors have to bear brokerage charges at the time of purchase of units from the exchange, which can range from 0.10-1 %. Investors cannot exchange gold ETF units for physical gold or jewellery.
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