21 May, 2011

Gold Funds - another good option

Gold is seen as a hedge against inflation, an insurance when currencies get debased and as an investment asset class by itself, which has low correlation with other investment assets.

When gold is bought as ornaments, the purity is compromised. Buying gold in the form of biscuits and bars is not the most efficient way either as the prices are still higher by between 5-15% than the raw gold prices. However, people buy gold bars and biscuits for investment and gifting. Large amounts of money can be parked in gold.

But physical gold has to be stored and it has its pitfalls. Since it is precious, it has to be secured properly, like in a bank locker. Insurance may have to be taken, which adds to the cost. However, there are other ways of buying gold.
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Gold ETFs: Gold ETFs (exchange-traded funds) have become popular as it does away with many of the problems of physical gold. Gold ETFs are products from mutual fund houses and can be bought in units.

However, one enjoys the same investment appreciation like raw gold. One unit corresponds to one gram of gold (in one of the cases, 0.5 gram). Units can be held in whole numbers only and fractional units are not possible. The company that manages ETFs will buy gold and hold it. This ensures that there is a direct correlation between the price of gold and the gold ETF units.

Gold ETF units can be held in a demat account. Also, the buying and selling of units will have to be done on the stock exchange like BSE or NSE. This means a person should have a demat account and should have a broker or trading account to buy and sell ETFs. This can be a problem for some. The costs here are the expenses charged, which ranges between 1% and 1.25% currently. Additionally, the stock broker may charge 0.5% on both the buy-and-sell transaction.

Transactions can happen if there are trades on the exchange. Liquidity is a factor of demand and supply. This is referred to as the impact cost, which is the bid-ask spread. Higher the volume, higher the liquidity and lower the bid-ask spread. Benchmark gold ETFs have the lowest impact cost. They are the biggest gold ETFs in the industry with a corpus of about Rs1,500 crore, in an industry asset under management for gold ETFs of Rs3,500 + crore.

ETFs also enjoy benefits like long-term capital gains after 12 months of holding and exemption from wealth tax.

Gold funds: Now, mutual funds have launched gold funds, which invest in gold ETFs. This is not to be confused with funds investing in gold and other precious metal mining companies like DSP BR World Gold Fund. These gold funds are being launched now to give further convenience to investors. It has the following benefits:

This is especially useful for those who do not have a demat account, as the investment is in the form of normal MF units.

Liquidity is assured as the asset management companies are the counter party.

Monthly investment of a regular amount by electronic clearing system is possible to be set up, for whatever duration.

The investment can be as low as Rs100 in one case and Rs1,000 in case of another fund.

There is no brokerage to be paid and the charges are capped at Rs1.5% per annum.

The other benefits like long-term capital gains treatment after 12 months and no wealth tax for units held in gold funds are the same like gold ETFs.

In summary, gold funds are a useful addition to the basket of investment options. Since gold has shown good, long-term performance, investing in this on a regular basis would be a good choice. With the low ticket size and the ability to set up systematic investment planshere, this ensures disciplined, regular investment. A golden opportunity for investors really!

Author - Suresh Sadagopan ; Published in DNA Money on 13/4/2011

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