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Gold Exchange Traded Fund – the smart way to invest in gold

Gold Exchange Traded Fund (GETF) was started in India in 2007, by Benchmark Mutual Fund. With this, you can participate in the gold market without taking physical delivery of gold and buy and sell your holdings on the National Stock Exchange (NSE).Currently there are around 10 Gold ETFs in India.

How they work?

GETFs are passively managed funds whose performance and returns will similar to the physical gold in the spot market. In this case, you can buy and redeem the units from either the Mutual Fund house or directly through the stock exchange. When you invest in GETFs, the Units are allotted in such a way that the value of each unit will correspond to 1 gram of physical gold. This means, if you are investing Rs.10, 000 when the cost of 1 gram gold is Rs.2000, you will get 5 units.

Advantages of GETFs

They’re virtual and so much easier to store and unlikely to be stolen. They need no lockers, no security guards etc. When you buy gold ETFs, though you own a certain amount of gold, you don’t actually get delivery of the yellow metal. You can store the units virtually in your demat account and save yourself the trouble of having to protect your gold from prying eyes of greedy relatives, robbers and looters.

The gold is pure and there’s no chance of you being fooled by jeweler. Gold ETFs only deal in 99.5 per cent purity gold. So by choosing them over physical gold, you spare yourself the consequences of misplaced trust.

They’re priced right and so, you’re not likely to buy gold at inflated prices. The problem with precious metals is that there is a lot of scope for price disparities. While one jeweler may offer the same quantity of gold at a certain price, another would have a different tag attached to it.

They’re more tax efficient because the taxation system for gold ETFs is the same as for non-equity mutual funds. If you hold gold ETFs for more than a year, you pay a long-term capital gains tax of 10 per cent without indexation or 20 per cent with indexation, whichever is lower, on the profits made. But in case of physical gold, you have to hold it for at least three years for the long-term capital gains tax to kick in. Gold ETFs held for less than a year attract short-term capital gains tax. Meaning the profits are added to your annual income and taxed according to the bracket your income falls in. Twelve months is far easier to wait for than 36 months, isn’t it?

They’re easier to sell and you get the right price. Physical gold bought from banks cannot be sold back to them. That bought from jewelers comes with an unfair ‘commission’ charged when you decide to sell. They’re more liquid than physical gold and fetch you the market price.

They’re available in small sizes. If you ask your local jeweler to give you half a gram of gold, chances are he’ll snigger. But gold ETFs are available in small denominations and you don’t have to have lots of spare cash to invest in gold anymore. One gold ETF unit represents 1 gram of gold.

They’re wealth tax-free. Physical gold attracts wealth tax if you’re holding more than Rs 15 lakh worth. But there is no such taxation for gold held through gold ETFs.

While gold ETFs score in so many ways over physical gold, they do not give you the satisfaction of seeing and feeling the yellow metal. So you have to necessarily go for physical gold for the minimum ornaments for your family members!

But if the precious metal is only an investment avenue for you, gold ETFs may be the way to do it. But limit your investment within 10% of your total portfolio.

5 Comments

  • V. Prasanna Venkatesan Posted May 11, 2011 5:45 pm

    Now, Gold look very attractive and the growth is also awesome. But, the growth is overheated since 2005. Will the growth sustain further also?

    • Finvin Posted May 13, 2011 5:34 pm

      We cannnot expect this kind of growth year after year. But even on a conservative look, the returns will be attractive in the long run. But keep it only as one asset class along with others.

  • Stock Tips Posted June 22, 2011 11:20 am

    Thanks so much for this! I haven’t been this moved by a blog for a long time! You’ve got it, whatever that means in blogging. Anyway, You are definitely someone that has something to say that people need to hear. Keep up the good work. Keep on inspiring the people!
    regard:
    Stock Tips

  • Ajay Posted July 19, 2011 2:07 pm

    Nice to get information about Gold ETF. Could you pl suggest one Gold ETF Fund to start SIP ?

    • Finvin Posted July 22, 2011 8:46 am

      Unfortunately, there is no SIP facility in Gold ETF in India. You have to buy it every month bu your own. Or you can think of Reliance /Kotak Gold Savings fund which invest in ETFs.

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