In Focus: Gold Plating

Indians love gold. You know it. We know it. The world knows it. But, what everyone should realise is that while they prefer to adorn themselves with it and flaunt, they are not too keen on viewing it as an investment. So while the launch gold-based exchange traded funds (ETF) has caused a lot of excitement in India, skeptics refuse to join the party.

Benchmark Mutual Fund and UTI Mutual Fund are the pioneers with the Benchmark Gold BeES and UTI Goldshare, respectively. Gold BeEs listed on March 19 and Goldshare on April 17 on the National Stock Exchange with much ado and fanfare. Skeptics were proved right till date since both raised close to only Rs 350 crore during their NFOs. There has been no surge in demand for the metal even though it is now easily available to the retail investor. One apprehension with regard to gold ETFs was whether the promise of liquidity would actually materialise. While it is still early to draw a conclusion, preliminary data puts these fears to rest with trading activity in the fund comparable to existing ETFs.

One of the shortcomings of the ETFs launched so far is that redemption does not translate into delivery of physical gold. As a result, if you want to buy gold with the redemption proceeds there will be a difference in the price quoted by the jeweler or bank and the price of the units sold by you. This is because the price of the ETF units is inclusive of expenses incurred in procuring and storing physical gold. Over and above this, you can further add the brokerage cost of trading in the ETF. Barring these costs, for those of you who get conned into buying jewellery as an investment, gold ETFs will definitely offer recourse.

Another benefit of the Gold ETF is that it is not liable to a securities transaction tax or even a wealth tax owing to its dematerialised form.

For future gold ETF new fund offers we would advise you to compare the entry loads with the brokerage cost of buying units from the exchange. As has been the case with the two new fund offers so far, the entry loads were much higher at 2.5 per cent for UTI’s Gold Share and 1.5 per cent for Benchmark's Gold BeES than the brokerage cost of buying the units from the exchange which could lie in the range of 0.25 - 0.75 per cent. So for those who missed the NFO, it may prove to be more economical buying it directly from the exchange.