By Madhurima R S
MUMBAI: Perhaps it is time for those in interested in gold to think of investing in `paper gold’. The Gold Exchange Traded Funds (ETFs) have returned an impressive returns of 31.42 % in the past one year while in the last one month alone the returns were an impressive 13 percent. In the beginning of the year, Gold ETFs had posted an impressive return of 38 percent on a year-on-year basis.
This has come at a time when BSE Sensex is falling and despite the hike in bank deposit rates, it is quoting below inflation rate of 12%. The Bombay Stock Exchange’s Sensex, on the other hand, fell 3.45 per cent in the same period. Returns from equity diversified funds dropped by 4.72 per cent
Those who have invested in Gold ETFs in the first half of the year, have reaped benefit, analysts said. Gold ETFs track the spot price of gold and are listed on stock exchanges. Benchmark Mutual Fund launched the first gold ETF. At present, there are five players in the market, namely, Benchmark, Kotak, Quantum, Reliance and UTI.
“Uncertain global capital markets, Rising inflation, falling stock markets, falling real estate prices, rising oil ( until recently), is the reality we have been facing . Uncertainity continues to prevail across the market. What can you do to insure your portfolio?
Simple : Buy Gold,”according to a communiqué by Quantum Gold Fund to its investors.
Gold could only add value to an investor’s portfolio. “Historically, gold has protected investors from declining stock markets and uncertainties. During periods of national crises, emergencies, wars, geopolitical strife or financial turbulence, investors rush to transfer investment assets to gold,” according to Quantum Gold Fund. It has traced the gold price movements right from 1973 oil crisis upto subprime crisis beginning 2007.
Meanwhile, those who haven’t invested in Gold ETF’s so far should wait till the festival season is over as ETF’s have reached attractive valuations, according to analysts. If dollar strengthens, gold prices are expected to fall which could be the right time to enter Gold ETFs.
Investing in gold ETFs will give the investor all the advantages of investing in gold while eliminating drawbacks of physical gold such as cost of storage, liquidity and purity. SIP investment enables the investor to accumulate units over time and average out the value of purchase through highs and lows. The units of gold ETFs can be redeemed either from the fund directly or from the market.
However, investors are cautioned to allocate around 5-10 percent in Gold ETFs and not a large part of the investment portfolio.
There are a large number of tax advantages in investing through ETFs vis-a-vis holding physical gold. For instance, if an investor holds gold ETF units for more than a year, he qualifies for the long-term capital gains tax at 10 per cent (without indexation) and 20 per cent (with indexation). In case, the investor sells within a year, the transaction will attract the short-term capital gains tax, depending on the person’s income bracket.
On the other hand, investors have to hold physical gold for three years to qualify for the long-term capital gains tax. For less than three years, the short-term capital gains tax is charged at 30 per cent. Gold held in paper form does not attract wealth tax.
The main problem for rapid growth of gold ETFs which were launched in India in March 2007 was the lack of awareness and complicated investment norms in India. Moreover, people still find charm in holding physical gold. The five gold ETF funds put together hold just above five tonnes of gold. According to the World Gold Council, Indian households own about 15,000 tonnes of gold, comprising around 10 per cent of global stocks.
