Gold ETFs make golden sense

This week I am finally going to do something I should have done a long while ago —- simultaneously thanking and apologising to readers of this column.

The thanks are for your overwhelming response week in, week out. The apologies are for not being able to reply to all those who write in; the sheer volume of emails makes it physically impossible to do so.

However, please do keep writing in and I will try and respond as best as I can.
There is yet another advantage to your email feedback. It provides me with subject matter to write on. For example, if I find that there is an issue or matter that several readers have raised, all of them can be answered at one time by way of an article on the subject. Previous write-ups on PPF, tax return forms and HRA, etc are cases in point. And this week’s article too is a result of reader feedback from last week.

To recap, last week we constructed a financial plan for the Mehta family, which helped them provide for their daughter’s education, marriage as well as their own retirement. Among other suggestions, it was recommended that the Mehtas provide for the anticipated gold requirement for their daughter’s marriage by accumulating units of a gold exchange traded fund (ETF) each month.

In this regard, several readers wrote in requesting more elaboration on the concept of an ETF and how this instrument may be used to buy gold bullion.

Well, ETFs are essentially mutual funds listed on the stock exchange. You can buy and sell them just like you would buy and sell a share. In the case of a gold ETF, the underlying asset is standard gold bullion. In other words, a gold ETF is just like any other mutual fund scheme —- only difference being that instead of being invested in equity shares, the monies collected are invested in gold. Generally, the price of one unit represents approximately one gram of gold. Since these are passively managed funds, the NAV will basically track the price of gold in the open market.

Currently, Benchmark, Kotak, UTI, Reliance and Quantum mutual funds offer gold ETFs. SBI MF had an ongoing new fund offer, which closed on April 28.

Now, in a country where gold worth over Rs 70,000 crore per annum is sold in the form of jewellery, coins, biscuits and bars, the total assets under management of these schemes amount to just around Rs 750 crore. This suggests that investors are either unaware or uncomfortable buying gold in the electronic form.

It requires a shift in mindset, which shouldn’t really be difficult considering we already own other equally valuable assets in a similar form. Think of the money in your bank. Whether you have Rs 10,000 or Rs 10 lakh or over a crore, the physical cash (hopefully) is not lying in your safe —- your bank passbook indicates the amount you own. Similarly, there was a time, not too long ago, when physical share certificates needed to be delivered and stored. Then we shifted to electronic holding and an investor’s life was never more convenient. Now, similarly, gold too can be held in the dematerialised, electronic form, which is a safer and more efficient way to own it.

For starters, there is no doubt on the purity —- you can’t get purer gold even if you tried and you don’t even have to depend on human honesty or scruples. With a gold ETF, impurity risk is non-existent.

Security is of course taken care of by the fund, unlike in the case of jewellery or other forms of physical gold where the threat of theft always looms.

As for denomination, as mentioned earlier, one can literally buy one gram at a time. Indeed, with Quantum, you can even buy half-a-gram at one time.

Though a traditional systematic investment plan, as we understand it, is not possible in the case of gold ETFs, one of my friends has been diligently picking up 5 grams of gold per month and by now he is already the proud owner of 70 grams of highest quality of gold.

When it comes to selling back, the making charges of jewellery cannot be recovered, in fact, it is generally bought back at a discounted price. Coins and bars also suffer from similar problems. Units of gold ETFs, on the other hand, can be sold by either a call to your broker or with a few clicks of your mouse if you have an online trading account.

Free of wealth tax and subject to long-term capital gains tax of 10% as against 20% in case of physical gold, tax benefits round off the manifold advantages of holding gold in the electronic form.

Gold prices have spurted by almost 26% over the last year, leading to an almost corresponding rise in the net asset values (NAVs) of the gold ETFs.

However, investors shouldn’t look at gold on the basis of returns in a particular period. This investment is essentially as a hedge against inflation and its quality of negative correlation with other asset classes like stocks, fixed income securities and commodities during uncertain times. When markets are erratic and times unpredictable, the wise thing to do is to step up exposure to an asset that would infuse a semblance of stability and strength to the portfolio. And the cleanest, simplest and the most efficient way to do this is by investing in a gold ETF.

Given the debasement many countries are subjecting their currencies to, one cannot help but feel that at the end of the day, bullion would prove to be more valuable than the billions.

The writer is director, Wonderland Consultants, a tax and financial planning firm. He may be contacted at sandeep.shanbhag@gmail.com.