We Indians just love gold! It is in our DNA. For us, it has not only emotional and sentimental value, it is a form of saving for the worst situation we may face in our lives. And yes, Indian households at present have a staggering 22,000tonnes of gold.
But buying physical gold has its own problems. The risk of theft, where to store it and the cost of storage. We wear the gold we own on special occasions and the rest of the time it is perhaps kept at home in our cupboards or in a bank locker.
How can one invest in gold in a safe tension free manner? The answer is the Gold Exchange Traded Fund or ETF. It is an open-ended mutual fund where one gold ETFunit is equal to 1 gram of gold and is backed by physical gold bar by 99.5%purity. These units are traded on the stock exchanges like shares of a company.
No need to worry about the storage cost (as in case of physical gold) because such units are held in demat or paper form. In the case of physical gold, one ends up paying extra for making charges as well, but there is no extra charge applied in gold ETFs. When needed, one can exchange them in multiples of 1kg units of 99.%5 purity.
The robustness of an investment portfolio plays a significant role in the achievement of goals. Equity has the ability to outperform any asset class in the long run, but the stock market is prone to high volatility in the short to medium term. With inflation averaging around 7% in the past five years, equity has actually delivered negative real returns. Therefore, the presence of gold in a portfolio makes it more stable and resilient to volatility or market fluctuation.
Equity in the past five years as measured by the BSE Sensex, has delivered anannualised return of just 2.67% compared with gold, which has delivered 27.19%annualised return over the same period.
GoldETFs provide an opportunity to investors to accumulate gold over a given period of time. Since it can be purchased in small quantities, one can plan the procurement as per future requirements, say, for the marriage of children, etc.
No sales tax, VAT or securities transaction tax is applicable on gold ETFs. It is eligible for the long-term capital gains after one year and unlike physical gold, investors don’t have to pay wealth tax on gold ETFs.
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– Melvyn Pinto
