Exchange Traded Funds(ETF)-FAQ's

        World of Finance by M.Vijaya Sai

1. Will gold ETF finally become part of the Indian investors' portfolio?
 


India is one of the biggest gold markets in the world. Last year, gold worth Rs 70,000 crore (Rs 700 billion) was traded in India. However, the stipulate is now shifting from jewellery towards investment. Nearly 5 years ago, demand for jewelery was 90% and demand for gold as an investment only 10% of the total trade. Investment in gold has picked up and has reached 30%.
 
Gold worth Rs 20,000 crore (Rs 200 billion) per annum is being sold in the figure of coins, biscuits or bars, while a lot of people are buying from banks. Banks have started selling gold in the precedent five years. Leading jewelers sell pure gold. There is an investment demand of Rs 20,000 crore for the gold. But when you go to the jeweler or the bank to buy gold coins, you have to pay 5-7% premium.
 
When you go to a jeweller to sell the gold or to get it transformed into jewellery, about 5-10% is cut from the total cost. Consequently, you never get the benefit of appreciation of gold. Now if you want to diversify your portfolio and want to invest in gold you can check out return figures. Gold has given 16% returns in the past 5 years. So, why not try to invest in electronic form of gold?
 
2. What portion of your portfolio should you put into gold?
 
Decide the level of exposure to gold in your portfolio on the foundation of one's ability to take risk and in keeping with the financial planning. Gold traded funds have low volatility as compared to both the equity and the bond market.
 
Despite low volatility, bond market has given returns at the rate of 16%. Rate of return from the gold has exceeded rate of inflation. Therefore, the gold should form about 25-30% of your fixed income portfolio.
 
3. What is Gold ETF?
 


ETF offers investors the ability to access gold in the gold bullion market with each unit representing one gram of the gold. The investor is actually buying the gold bullion in the form of an exchange-traded security.
 
Money collected in the Gold ETF is kept in the form of physical gold, which is held in the vaults by the custodian bank and traded on the London bullionexchange.
 
Gold will now be traded on National Stock Exchange. It's trading will start in the first or from the second week of April.
 
4. Is it possible to invest in gold ETF if one hasn't invested during initial offer?
 
Trading in the gold is similar to buying shares through the broker. You can see its price on the NSE terminal and place a buy or sell order through the broker. It will be credited to your demat account. No Security Transaction Tax (STT) is applicable on  ETF.You have to pay brokerage and service tax.
 
5. Does one need a demat account to invest in gold ETF?
 
Yes.You need to have demat account to invest in gold ETF. 
 
6. What are the benefits of investment in gold ETF?
 
When you go to the bank or a jeweller to buy the gold, you have to pay a certain premium. As a result, returns contract. A premium of 20% if charged on small coins of 5 gram each and 5-10% on the gold coins weighing more than 5 grams. When you go tojewelers to sell gold, it is taken back on a discounted price. Apart from this, you have to keep your gold in the lockers and pay for locker facility.
 
7. Can one buy gold contract by making a margin payment on a commodity exchange, particularly MCX?
 
Gold is not traded on commodity exchange. One invests in the gold futures. Future prices are always different from gold prices. There are several limitations in taking delivery of the gold. It is not always possible to get physical delivery of the gold.
 
You only get a physical delivery of the gold at a few places. Secondly, it is always credited to a separate account and not to your demat account. There is a major difference between the gold futures and physical gold. Gold ETF is to be invested in physical gold, which is kept with the custodian bank and can't be lent because gold belongs only to investor.
 
8. How is tax calculated on gold ETF?
 
There are more tax benefits on the gold ETF as compared to physical gold. Capital gains tax calculations are similar to the tax calculations on the bond funds. When youinvest in physical gold, long-term capital gains tax is levied only after three years. In case of the gold ETF, which is a kind of mutual fund, long-term capital gains tax is levied one year after purchase.
 
You will get the benefit of indexation. But when you keep the physical gold, you have to pay wealth tax, which doesn't apply to mutual funds. If your wealth crosses Rs 15 lakh (Rs 1.5 billion) in a year, you have to pay 1% as a wealth tax. Besides this, you save on STT (Security Transaction Tax), which you have to pay on other securities in the secondary market.
 
9. What are the benefits of investing in gold?
 


Worldwide, the government and individuals keep the gold. Many governments move forward and would want to keep their forex reserves in the gold. Developed countries such as USA and UK always try to keep 60-70% of their reserves in gold.
 
But some of the developing countries like India, Brazil, Russia, have only 1-2% of their reserves in gold. As US dollar is becoming volatile, its deficit in US is growing and US dollar, according to economists, will grow very weak.
 
Many of the developing countries are now thinking of keeping more forex reserves in the gold in order to prevent impact on their reserves due to volatility. So, governments will buy more gold in the future. Suppose there's a war or a big currency crisis, like the one in 1997-98 when currencies of strong economies like Singapore, Malaysia depreciated by 30-40%
 
While it is certain that the currency gets depleted in case of a currency crisis, stock market and bond markets also get depleted.Gold is an investment option, which can position against the tide.

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