Gold in digital state !!

With financial year coming to an end I am pretty sure everyone must be ensuring that the minimum investment of Rs. 1 lakh is accomplished. These investments are tax saving or tax free investments. Over and above this minimum amount whatever investments are made are taxable but at the same time we get high rate of return and these investments become very essential during post retirement expenditures and also during some major medical expense, child education, marriage and other such major events. There are hundreds of investment instruments available in the market of which one is Gold ETF.
The approach for investment in Gold is different from the one we use for investing in stock or real estate. Here timing of investment is not so critical. The decision making here is when actually are you really willing to invest. The real intention to invest in gold is to diversify the investment portfolio so that overall wealth is not compromised by economic dangers and uncertainties. Depending on the current economic, financial and political situation as well as the income, one should invest between 10% and 30% in gold.

ETFs are listed and traded on stock exchanges like stocks. They enable investors to gain good exposure to commodity, on a real-time basis, and at a lower cost than many other forms of investing. Gold ETFs invest in gold bullion or gold-producing companies and so it is called performance tracker of Gold Bullion. Gold exchange traded funds are also known as gold funds. The share prices of gold ETFs are related with the spot price of gold. This means that the EPF appreciates with the increase in price of gold and it depriciates with fall in the gold price. The first gold exchange traded fund, Gold Bullion Securities (GBS), was launched in 2003 on the Australian Stock Exchange.
With Gold ETFs an investor can participate in Gold bullion market without atual taking or possesing the gold in physical form and can trade it through the trading of a security on stock exchange. The returns on Gold ETF are almost similar to the returns provided by physical gold. Each unit is approximately equal to the price of 1 gram of Gold at the time of purchase, however there are certain Gold ETFs which also provide a unit which is approximately equal to the price of ½ gram of Gold.
Gold ETFs are traded in most of the major stock exchanges of the world, including bourses in New York, London, Paris, Zurich and Mumbai.
The annual expenses, such as insurance, storage and management fees, are charged by selling a small amount of gold that is represented by each certificate. Hence, the amount of gold in a certificate declines over time. In some countries, gold ETFs are used as a way to avoid VAT or sales tax. There are cetainly number of benefits of possessing the Gold ETF. The most important thing of having Gold ETF is we need not have the physical possession of Gold. As we dont have a physical possession we need not worry about the robbery or loss of the asset. There is also a risk factor involved as the prices of ther Gold ETF vary based on the speculation and so trading risk is always involved.

Why Gold ETF?
  • Investing in gold diversifies the investment portfolio.
  • The value of the metal is almost same all over the world and so irrespective of the currency of any country it is an asset whereever you carry it.
  • As compared to shares, gold is less volatile. So the risk involved is of less magnitude.
  • As the trading of the ETF is done on bourses all over the world, the quality and genuinity of the metal is trustworthy. There is no adulteration at all.
  • Amongst the few investment instruments, Gold ETF is one of the instrument where returns are higher than the growth in inflation. So it acts as a hedge against inflation.
  • There is no need to possess the gold in physical form and so there are no storage and security issues. Specially when the cases of robbery and theft on rise in India to have the possession of Gold in electronic form through ETFs is a boon.
  • It is most liquid form of investment. You can sell this asset with least hassles and get your money immediately.
  • It is easy to deal in ETF. the only thing you need to have is a Demat account.
  • As the ETF's are traded on bourses there is a transperency in pricing.
  • Another big advantage is its even good source for investment for retailer investors like you and me wherein we can even trade 1 ETF in secondary markets.
  • The value of 1 unit is not more than value of 1 gm of Gold. Its approx the same or lesser upto 1/2 gm. of Gold.
Why is Gold ETF better:

S 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
For investing in Gold EtF you only need to have a demat account as you can only trade in EPF if you have a demat account. But the best part is like equity / shares there is no lockin period and unlike mutual funds it does not have any entry or exit load. (Entry load is the initial charges collected by mutual fund company, which are non refundable. Exit load is the fee collected at the time of withdraw of your investment.) The taxation for the Gold ETF is not complicated at all. 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.
The Flip Side: At the time of designing scheme for Mutual Funds or Security Investments an objective is decided. But due to volatile markets and financial uncertanities no assurance of achieveng the objective is given. Same is the case with Gold ETF. The unit value of the Gold ETF depends on the spot value of the Gold and hence the value of the Gold ETF may go up or down depending on the Bullion market, the Money market and the availability of the yellow metal. The past performance of the fund house which floats the scheme for the Gold ETF has no co relation with the future of the scheme floated. No fund house can predict the future of the scheme or the performance of the Gold ETF as its a game of the global market conditions. Hence no fund house can assure return on any scheme to the investor.
Investments in Gold ETF being relatively new to Indian markets there may be a lack of data and even the investors and consultants may not be aware of the proper schemes and proper time of investing. Again due to fluctuating market conditions there is a chance the investors may suffer a short term loss as the NAV of the Gold ETF may drop temporarily. This may cause panic and the investors may loose faith in this instrument and the scheme may fail to make profits due to backing off of the investors. There is also a probability of certain rumors in the market which may at times make the investors panic. To put it in one line, there is no assurance to the investor of getting the value of his ETF at the end of the period which was anticipated when he invested in the scheme.

Gold ETF and India: Though ETF is a relatively new concept, many investors in India are showing keen interest. The different types of Gold ETFs are:
  • Gold ETFs that Own Physical Gold
  • Gold ETFs that Own Gold Mining Stocks
  • Gold ETFs that own Future Contracts
  • ETF Double Gold
  • Gold Short ETFs
Some of the popular gold ETFs in India are as follows:
  1. Kotak Gold ETF (KOTAKGOLD): This is Kotak's Gold ETF that tracks the price of Gold in India. The ticker is for NSE.
  2. UTI Gold ETF (GOLDSHARE): This is UTIs ETF that tracks the price of gold in India. The symbol is GOLDSHARE and is for NSE
  3. Reliance Gold ETF (RELGOLD): This is the Reliance Gold ETF that tracks the price of gold in India and the symbol RELGOLD is for NSE.
In the book 'The ABCs of Gold Investing: How to Protect and Build Your Wealth with Gold' the author says "No matter what happens in this country, with the dollar, with the stock and bond markets, the gold owner will find a friend in the yellow metal -- something to rely upon when the chips are down. In gold, investors will find a vehicle to protect their wealth. Gold is bedrock." And i think its true with India as well......Happy investing!!!!!

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Gold in digital state !! Gold in digital state !! Reviewed by Pranav Joshi on 11:24 Rating: 5

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