Where to buy:
1. ICICI Bank is selling gold coins in denominations of 2.5g to 50g at select branches.
2. Mutual Funds dealing with equities of foreign gold mining companies
3. ETFs(Exchange Traded Funds)
This is a nice article on ETFs:
In order to cushion the losses resulting from stock market slowdown and rising inflation levels, Rajesh Gupta, a 43-year-old salaried professional, was advised to invest a part of his money in gold. His financial planner backed this advice with the fact that gold has traditionally worked as a hedge against inflation and the declining dollar and has given the investor steady returns.
But Rajesh didn’t want to deal with issues associated with storing gold in its physical form or ensuring the purity of the gold. His financial planner then told him to invest either in Gold Exchange Traded Funds (ETFs) or gold mutual funds. But the question remained, which one? To help you make the choice, SundayET gives you a lowdown on how to buy gold ETFs and gold mutual funds.
DIFFERENT ASSET CLASSES
According to Lakshmi Iyer, product head-vice-president, Kotak Mutual Funds, “The basic difference between gold ETFs and gold mutual funds are that they belong to two different asset classes.” Gold ETFs give the investor the opportunity to invest in units of gold, which are then traded on the exchange as a single stock. The units issued under the scheme represent the value of gold held in the scheme. Gold ETFs hence fall into the category of commodities.
Gold mutual funds, however, fall into the equity category as they 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 AVAILABLE
The predominant criterion for all investment remains the returns that can be expected from these funds. An investor should expect a return of around 15% per annum over a two to three-year time horizon. Says Pankaj Sharma, executive V-P and head, business development and risk management, DSP Merrill Lynch Fund Managers: “The world gold fund has given absolute returns of 31.9% in the period since its inception in August 2007 to July 2008.” He adds that the gold fund they invest into has given an annualised return of 29.5% over the last three years. However, 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% of your assets must be invested in gold.
NATURE OF FUNDS
There is also a strict difference with the regard to the aims of this fund and how they are managed.
Gold ETFs are known to follow a passive investment strategy. “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,” says Iyer. However, when choosing between ETFs, investors need to be aware of the tracking error, which is the difference given by the gold ETF and those given by physical gold.
In fact, 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. “The fund manager has an understanding of the quality of gold reserves to mined and will be able to decide which companies will do better than others,” says Ruchir Parekh, fund manager, AIG World Gold Fund.
THE MULTIPLIER EFFECT
The reason most gold mutual funds give for choosing a mutual fund is that stock prices of gold mining companies have risen much more than the price of gold itself. According to Parekh: “The GDM index, an index of gold miners, has moved up close to 6.5 times since 2000 as compared to a gold price increase of over three times in the same period.” “There is a multiplier effect on the profitability of gold mining companies with the rise in gold prices, on account on operating leverage,” adds Sharma.
COST BENEFITS
ETFs give investors the opportunity of buying as less as 1 unit on the exchange. Since investors can enter the trade through brokers, there is no entry or exit load and brokerage expenses are not very high. This is favourable in comparison to mutual funds, which have a defined load structure, entry and exit loads and other expenses. However, things like minimum unit size vary for investors who invest in ETF via asset management companies.
THE TRADING EDGE
The advantages of holding ETFs are seen during trading, given that ETF units can be traded like shares. It gives the investor the ability to buy and sell quickly at market price, making them highly liquid assets. Moreover, intra-day trading is also possible with an ETF, which is not possible with open-ended mutual funds. Moreover, portfolio disclosures occur only once a month in a mutual fund but everyday in an ETF.
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Another important point:
"In short, selling gold within three years of purchase will attract capital gains tax. Moreover , holding large quantities of physical gold can attract wealth tax, while gold in demat form does not. This apart, the spread between the buy and sell prices pertaining to gold ETFs is less than that of physical gold. "
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The prospects for gold
Many contemporary investors forget that when gold price went up during the late 1970s, the metal was just trying to catch up with prices of other things, which had already gone up.
In 1970, when the price of gold was $35 an ounce (due to the gold standard then followed in usa), it was unquestionably undervalued. When gold hit $850 an ounce in January 1980 it was again, unquestionably, overvalued.
If the increase in gold price had kept the same pace in 1980s and 1990s as it did in 1970s, it would have become $20,000 an ounce by 2000. With a number of Central Banks selling off huge chunks of their gold reserves, the international price of gold has come down in the last few years.
Timothy Green, a well-known gold expert, reminds us of a historical truth: 'The great strength of gold throughout history has not been that you make money by holding it, but rather you do not lose. That ought to remain its best credential'.
A research study on gold established a remarkable consistency in the purchasing power of gold over four centuries. Its purchasing power in the mid-twentieth century was found to be nearly the same as in the middle of the seventeenth century.
You can safely invest in gold. But take care to keep your jewellery in bank lockers. You can also raise loans on gold for your other portfolio investments. If the Indian economy continues to be liberalised and unshackled fast, several new options may emerge for investors to invest in gold bars, gold coins, gold funds, gold mining companies and gold options.
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Q. What proportion of your portfolio should you put into gold?
You should decide the level of exposure to gold in your portfolio on the basis of one�s ability to take risk and in keeping with the financial planning. Gold traded funds have low volatility as compared to both equity and bond market. Despite low volatility, bond market has given returns at the rate of 16%. Rate of return from gold has exceeded rate of inflation. Therefore, gold should form about 25-30% of your fixed income portfolio.
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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)
