A Golden Opportunity…

India’s longstanding affinity for gold  is well known. Indians account for 23 per cent of the annual global gold offtake. Gold reaches so deeply into India's household finances, so much so, that private individuals in India are now believed to own between 13,000 and 15,000 tonnes of gold - up to 10% of the global cumulative mine production. That's a larger hoard than the US, German and French governments put together. With the launch of Gold Exchange Traded Funds (GETFs) by Benchmark AMC and UTI AMC, India, the world’s largest gold consumer, has become the seventh country in the world that has GETFs.  Nearly half a dozen GETFs are in the pipeline in India…

GETF, in a nutshell

GETFs are open-ended mutual fund schemes that are traded on the stock exchanges. A GETF unit is a mutual fund unit backed by gold as the underlying asset and is held in dematerialised form. GETFs are designed to offer you a means of participating in the gold bullion market without the necessity of taking physical delivery of gold.

The modus operandi

The mutual fund launching a GETF appoints Authorised Participants (APs), who initially buy the units of GETF from the mutual fund by exchanging actual pure gold for the units of GETF. The gold will be stored by a custodian on behalf of the mutual fund. You can also buy GETF units from the fund house during the initial offer period. Let us say, the per gram price of gold on the date of allotment is Rs 950 and you invest Rs 10,000. If the mutual fund charges an entry load of 1.5 per cent, the net amount invested is Rs 9,850. Given the price of Rs 950 per gram, you will be allotted 10.37 units. Each unit normally represents one gram of gold. All subsequent transactions will be facilitated by the APs and should be routed through the National Stock Exchange (NSE). You can buy or sell the units in the secondary market only through a demat account and you need a trading account with a NSE broker. Unlike APs, investors like you do not get any physical gold on sale of units. Like other mutual fund products, GETFs will publish their NAV on a periodic basis and this would be linked to the prevailing gold price. Under the present regulations, GETFs in India will track London gold prices expressed in US dollars, and will represent `standard' gold of 99.5 per cent purity.

Balancing the scales

Positives

Hitherto, you turned either to jewellers or banks for purchasing gold. While banks provide assurance on quality, there is no secondary market for this gold. Most jewellers would buy back gold, but at a high discount..GETFs fill the lacunae of safety, convenience, quality considerations and liquidity in gold investing. As GETFs are issued in demat form, the risk associated with holding physical gold is reduced considerably. Moreover, you can invest in gold without worrying about the purity issues that usually dog jewellery purchases. GETFs offer better liquidity at prices closer to the market than gold bars or jewellery because you can liquidate your ETF units at NAV-based prices through the stock market.

GETFs allow you to invest in gold even if you have a small investible surplus. Instead of waiting until you accumulate enough funds to buy a 50 gm gold bar, you can make an investment in GETFs with an outlay of just Rs 10,000, to start with. You can also gradually build your exposure by buying additional units as and when you can afford them as a risk diversification strategy and an efficient hedge against inflation.

Investing in GETFs gives you tax advantages over investing in physical gold. GETF units held for more than one year qualify for long-term capital gains at 20 per cent, whereas the holding period in physical form has to be three years to qualify for long-term capital gains. Short-term capital gains are taxed at 30 per cent. Unlike physical gold, GETF is not liable for wealth tax.

Negatives

On the flip side, returns on GETFs may be lower than those on physical gold by virtue of management fees, transaction costs and other operational expenses levied by the fund house on the fund's NAV. Competition between different GETF products may ensure that these products generate returns that are pretty close to those generated by physical gold. If the GETF units are not actively traded in the stock market, you may not be in a position to exit your holdings at the time or price of your choice. The problems associated with liquidity may be sorted out if the idea of GETFs really catches on with investors.

The bullion dollar question - will the jewellery-worshipping Indians embrace GETFs as an investment avenue?

The answer is yes, if you go by the trends in the global GETF market. As per the latest data released by the World Gold Council, worldover investors looking to put money in gold are increasingly routing it through GETFs. The recently concluded GETF offers in India by both Benchmark and UTI bear testimony to this fact. Nevertheless, it might be hard to convince retail consumers, small investors and jewellers to invest in GETFs in India, where jewellery accounts for 80% of the annual gold demand of about 800 tonnes, nearly a quarter of the global bullion demand.  Given the interest of Indian households in gold and the 'psychological comfort' that gold offers, GETFs offer a new and superior investment channel. If you buy gold for investment purposes, you don't need to look beyond gold funds. It’s a GOLDEN opportunity indeed to diversify into a different asset class to hedge your investment in stocks and mutual funds.

n Mrs. Lalitha Muthu