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Portfolio: GOLD FUND

Use GOLD FUND to Capitalize on rising gold price - How Gold Fund works for investors keen on exploiting the yellow metal’s potential
With the recent spurt in the price of gold, gold funds are looking brighter. Recently, a gold exchange-traded fund (ETF) touched its all-time high of Rs 1,504 on the National Stock Exchange and closed at Rs 1,503 per unit. Other gold ETFs have touched new highs as well. There has been higher buying interest in gold ETFs. The price of gold here crossed Rs 15,000 per gram. The international price is around USD 962 per ounce.

Higher global gold prices, combined with the rupee going below 49 to a dollar, helped in the surge in gold prices here. Gold ETFs have delivered a handsome return of about 30 percent over last one year.

Gold ETFs have the basic characteristics of mutual funds. They are traded like stocks on the exchanges. The fund is available for investments on the stock exchange, and it can be bought and sold like any stock. An ETF is normally linked to an index. It mirrors the performance of the index.

In a gold ETF, the fund's performance depends on the price movement of gold. Hence, the movement in the value of the fund depends on the movement in the gold prices. This makes it a useful tool for those who want to consider gold as an investment option and gain from its price movements. The investors do not actually accumulate gold. In case investors require gold, they have to sell the units of the fund and buy gold.

As the price of gold increases, the price of the funds will also rise and vice versa. When the units are available on the exchange, they can be bought and sold like any stock. This also gives an indication to investors of the expenses that will be incurred. Brokerage charges have to be paid when units are purchased and sold. This is slightly different from other mutual funds where there are additional charges like entry and exit load when the investment is made.

The funds are open-ended, passively-managed, and designed to provide returns (before expenses), that closely correspond to the performance and yield from gold. Gold ETFs offer investors the advantage of investing in high quality gold without the burden of physical delivery. The gold ETF will be traded on the stock exchange (to start with on the National Stock Exchange) on a real time basis (i.e. buying/selling can be done any time during the trading hours) after the new fund offer (NFO) period.

After the fund is listed on the stock exchange, investors can buy or sell units directly from the exchange through a stock broker. While dealing with a stock broker there is no entry load, instead, investors have to pay brokerage/commission (usually hovering around 0.50 percent of the transaction value). The minimum number of units that an investor can buy or sell through the exchange is one. The value of each unit will equal (approximately) to the price of one gram of gold. Being an ETF, its performance will be closely linked to that of the domestic gold price.

These ETFs have high entry loads during the NFO period. The high load makes gold ETFs an expensive investment proposition and for a commodity, this could impact returns adversely. If the investor buys the gold ETF on the exchange, he has to pay the broker's commission however, which is a lot lower than the entry load during the NFO period.

The Securities and Exchange Board of India (SEBI) guidelines permit fund houses to charge up to a maximum of 2.50 percent. There are tax implications. Gold ETFs are treated as debt funds. Hence, tax incidence on sale of gold ETF will be similar to that of debt funds. This means tax on long-term capital gains is the lower of 10 percent without indexation and 20 percent with indexation. Short-term capital gains will be added to your income and taxed at the marginal income tax rate.

The funds invest in gold bullion and reflect the international price of gold in the market. Every unit of the gold ETF would approximately represent one gram of pure gold and the unit allotted under the scheme would be credited to your demat account.

These funds offer investors a new, innovative, relatively cost-efficient, and secure way to access the gold market without the necessity of taking physical delivery of gold.

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