Gold exchange traded funds (ETF) are mutual funds, whose units can be traded on the stock exchanges, just like shares of companies. Through a gold ETF, an investor can own gold in the dematerialised format, thereby eliminating the cost and risk associated with physical gold investments.
Some of the mutual fund houses to have launched gold ETFs are Benchmark Mutual Fund, UTI Mutual Fund, Kotak Mutual Fund, Reliance Mutual Fund and Quantum Mutual Fund.
With gold ETFs in the market, one needs to wonder whether purchasing gold bars or jewellery is really the best way? By the time the daughter reaches her marriageable age, chances are that the designs of the jewellery accumulated would be outdated.
Additional expenses would have to be incurred as making charges if the old jewellery is moulded into new ones. Further, there are costs associated with storing in terms of fees paid for a bank locker and for insuring gold.
Also, on several accounts, purity of gold cannot be confirmed. The buyer has to keep faith in the local jeweller and would know of the purity only when he tries to sell the gold in times of need. Yes, there are banks that offer certified gold, but remember that banks charge a premium of nearly 15% for the coins they sell.
Moreover, they never buy them back if you wish to sell. Even if you try to sell the coins to a jeweller the same day, you would lose the entire amount charged by the bank as premium.
Instead of buying gold jewellery or for that matter gold in the raw form, individuals now have the choice of buying gold ETFs.
As gold ETFs are held in the demat format, any individual wanting to invest in these schemes needs to have a demat account. He can, thus, do away with the risk and trouble associated with holding physical gold. Also, an individual need not compromise on the value of investment or on the jewellery trend. Further, as gold ETF is in the demat form, there would be no purity-related risks.
One can either invest in these mutual funds during new fund offer (NFO) periods when the scheme is launched or buy gold ETF units from NSE. Investing during the NFO period would attract entry load, which differs from one mutual fund to the other, and have a minimum investment amount. Post NFO, however, there would be no entry charge, but a brokerage charge of as low as 0.4-0.5% would be levied by your stock broker.
Also, after the NFO period, investors can buy as low as one unit of gold ETF at a time, which essentially means one gram of gold at a time. This facility should work out well for individuals looking to build the necessary gold bank required for the marriages of their sons and daughters, but do not have the necessary money to buy the gold in a single shot.
The units accumulated over a period of time can be sold at the time of need. The money, thus, collected can be used to buy gold jewellery when required.
The daily net asset value (NAV) of gold ETF is decided by the price of gold. The value of investment in gold ETF is expected to closely track the actual market price of gold. On a day when the market price of gold stood at Rs 1215.5 a gram, the Gold Benchmark Exchange Traded Funds (Gold BeEs) from Benchmark Mutual Fund was trading at Rs 1221.
The difference in the trading and the market price is because of the value added tax. Also some difference can be attributed to the expenses involved in running the scheme.
But, trading gold ETFs units differs from trading company shares so that securities transactions tax (STT) is not applicable. In addition, gold ETFs help you save wealth tax, charged on physical gold investments exceeding Rs 15 lakh. In case of gold ETFs, gold is held by an investor in the dematerialised format or in units and hence no wealth tax is levied. However, gold ETF is a non-equity scheme and would attract a dividend distribution tax if an investor chooses the dividend option.
Remember that at the time of redemption, units of the gold ETF would be exchanged for cash and not physical gold.
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