Investing It! : gold ETF

Should You Invest in Gold on this Akshaya Tritiya?

Yogi — Fri, 10 May 2013 09:11:00 GMT

Akshaya Tritiya is one of the most auspicious days in the Hindu calendar. The word “Akshaya” means imperishable and eternal prosperity which never diminishes. So, new ventures made and valuables purchased on this day would be fruitful and believed to bring luck and success. Traditionally, in India, on this day people purchase gold as it is the symbol of wealth, prosperity and fortune. This year, it will be celebrated on 13^th May, 2013.

Every year, to attract buyers; jewellers and banking institutions offer various attractive schemes such as offering a free silver coin on purchase of gold, discount in making charges on gold jewellery and discounts on gold coins.

Let’s analyse the performance of gold as an investment avenue from Jan-2008 to May-2013 (up to 8^th May, 2013) and 1^st Apr, 2013 to 8^th May, 2013.

Graph 1: Price of gold (per 10 gram) increased by 18% CAGR during Jan-2008 to May-2013

Source: Bloomberg

We saw “Bull Run” of gold price in last 5 years which we can analyse from the above chart. There were various reasons and many investors followed the herd to gain profits by investing in gold. However, investors who invested in gold when prices were at peak would be in loss or nominal profits since there was a drop in price of gold in last one and half months, which is shown in graph 2.

Graph 2: Gold price dropped by 9% in last one and half month

Source: Bloomberg

Analyzing recent correction in prices of gold and with no other positive trigger except for Akshaya Tritiya festival, analysts are expecting prices to stay in the range of Rs 25,000 to 28,000 per 10 gram in near term.

I know various people among family, friends and society who would do not look at co-relation of economy with gold price. They simply have 10 general or superstitious reasons to invest in gold. However, I would like to share 5 reasons why you should not invest in gold on this Akshaya Tritiya:

Buying gold on this auspicious day only due to superstitious belief of growing wealth.
Investing in gold due to speculation of gold price will continuously increase for next 2 – 3 years.
Simply buying gold since your financial advisor told to invest in this yellow metal.
If your portfolio already consist of 10% investment in gold.
Considering gold can help to grow your wealth. However, fact is, in long term investment in gold helps to preserve wealth, not grow it.

Stating reasons you should not invest in gold doesn’t mean I have negative view on gold but there should be timing to enter as investor. Portfolio should be well balanced with various asset classes, speculating in the future of gold price will diminish your wealth instead of growing it….!!!

Most readers would have already made their mindset to invest in gold on the day of Akshaya Tritiya. So, here are various investment options available to invest in gold:

Gold Jewellery
Gold bar / coins
E-gold (National Spot Exchange Limited)
Exchange traded fund (Gold ETF)
Gold funds

This year, we recommend you to invest in gold ETF / E-gold / gold funds instead of buying physical delivery of gold jewellery from showroom or gold coins from banks.

Reasons:

There is additional cost to purchase gold from showroom or banks. These additional costs involved will be making charges, VAT on purchase of gold and premium charged by banks on purchase of gold coins. On other hand buying paper gold will involve brokerage, maintenance charge and transaction charge which will be much lower than physical gold.
There are holding charges (locker) in the range of Rs 1000 to Rs 2500 per annum on delivery of gold products. In paper gold, you will pay maintenance / demat charges in the range of Rs 150 to Rs 300 per annum.
The price of physical gold is lowered when we go to sell in shops (impurity of gold and making charges are deducted). In paper gold, you will incur brokerage charges in ETF and in E-gold, if taking delivery of gold, then 1% VAT and 1% as making charges of gold coin.
Most importantly, paper gold products are considered highly liquid, so, in an emergency they can be sold off quickly.
Investing in gold saving funds with a systematic investment plan is also one of the best alternative ways to invest regularly in gold. This will help you ride though volatility in gold prices without taking on the risk of bad timing.

Conclusion

Now, after analyzing and discussing the current scenario of gold prices, whether you should invest or not in gold on this auspicious day is a personal choice. It’s recommended to first analyse one’s needs to invest in this yellow glittering metal. If you have decided to invest, then don’t run for attractive schemes offered by showrooms or banks to invest in physical gold. Instead, opt to invest in gold funds with systematic investment plan / gold ETFs / E-gold option which will save additional costs, lower the risk and also offer liquidity.

InvestmentYogi wishes all its subscribers, “A new beginning of greater prosperity, success and happiness on this auspicious day of Akshaya Trithiya. Wishing you all Happy Akshaya Trithiya.”

Author

Hiral Thanawala is a PGDM (Finance) graduate and Certified Financial Planner with an experience of over 5 years in equity market and personal finance domain. The views explained by him are personal. He can be reached at expert@investmentyogi.com.

Calculators:

SIP Maturity Calculator

Monthly SIP Calculator

GOLD ETF Becomes More Attractive Now

Yogi — Mon, 25 Feb 2013 06:46:00 GMT

Introduction

Gold monetization and pressing need to use the Gold held by Asset-Management Companies has picked up steam after Securities and Exchange Board of India (SEBI) circular. There has been an impeccable urge that Gold held by households and Gold Exchange-Traded Funds (ETFs) are brought to book. Reserve Bank of India (RBI) has come out with plenty of suggestive measures how the Gold held by the ETF can be actively utilized for the benefits of investors and even for the governments who are worried about the rise in imports. Keeping this in mind market regulator SEBI has recently issued a circular allowing Gold ETF AMCs to deposit their Gold in Gold Deposit Scheme (GDS) of banks.

Purpose of Gold ETF Expanded

The primary purpose of Gold ETF as per SEBI regulations 1996 was to invest in Gold and Gold-related products. These products consist of Gold as the underlined commodity in which the Asset Management Company can invest into. After the circular, SEBI has allowed the Gold deposit scheme (GDS) of the bank as an instrument where ETFs can deposit their Gold. The basic purpose of this deposit is to churn more returns for the investors. The bank accepting the deposit will later use it as per RBI guidelines.

Conditions Involved While Depositing in GDS

The first condition of depositing in the Gold deposit scheme is that the entire investment in such scheme will not exceed 20 percent of total assets managed by Gold ETFs.

Another prior condition before investing in GDS schemes by the banks is that a written policy should be introduced with approval from the board of AMC and its trustees before depositing in such schemes.

Each investment proposal of GDS with Bank should be after the mutual funds take approval of their trustees. The policies are also liable to be reviewed once a year by the Mutual funds. All the certificates issued by the banks in lieu of the investments in the GDS schemes will be held by Mutual funds in dematerialized form.

Gold Deposit Schemes

The investments in Gold deposit schemes are for a maturity period of three to five years. The returns on the deposits will be after assaying the total number of grams that is deposited. Banks will have the advantage of utilizing the Gold for meeting the requirements of the jewelers that will in turn reduce the heavy reliance on imported Gold.

Total Assets under Management

The latest data released by Association of Mutual Funds of India (AMFI) showed that the AMC managed Gold ETFs value was Rs 12057 crores in January 2013. If Gold ETFs invest their maximum limit of 20 percent in GDS of the banks that turns out to be Rs 2411 crores. The returns in terms of interest generated from these deposits will be utilized by the Mutual funds for passing the benefits to their customers.

Benefits of the Move

Budget deficit of 5.4% is out of the roof, and before it increases further government is worried on taking right steps even though they are much delayed. The belief that rising import duties is a temporary solution is getting cemented. The measures of monetization and effective utilization of Gold deposits of India is the order of the day. Finally, some measures are being adopted by the market regulators who will exploit Gold holdings in a much more efficient way. Government target to reduce the fiscal deficit to 4.8% of GDP by next financial year is achievable not by increasing duties but by channelization of the huge Gold holdings within the country.

About the author:

Amit Sethi is an MBA (Fin) graduate and a Financial Consultant. He has spent 10 years in Equity research, Stock broking and Financial Consultancy Sector. He can be reached at amvilube@gmail.com

Analysis of MOSt Shares Gold ETF – NFO

Yogi — Tue, 06 Mar 2012 05:30:31 GMT

Motilal Oswal AMC has launched a New Fund Offer (NFO) scheme to invest in gold bullion. This scheme is named “MOSt Shares Gold ETF” with unique offering of investment *** consumption – in a very cost effective way and lower prices. Investment is this gold ETF scheme will be boon for retail investors.

Key Features

Objective:

To provide return by investing in gold bullion.

Benchmark:

Spot gold price.

Fund Manager:

Mr. Rajnish Rastogi

Subscription date:

This NFO will be open for subscription from 2^nd March 2012 to 16^th March 2012.

Investment during NFO:

Minimum investment Rs 10,000 and multiples of Re. 1

Buying or Selling of ETF units:

In trading lots of one unit (1gm) on stock exchanges and directly with AMC in creation of 10 units and multiples.

Entry and Exit Load:

Nil

Recurring expense:

1.3% p.a.

Settlement process:

The delivery of the physical gold will take T+5 days where “T” is the transaction day. The redemption of the same gold ETF in cash on exchanges for investor will take T+2 days.

Advantages of investing in this scheme

An investor for the first time gets an option to buy gold directly from AMC in 10 gram lots or buy/sell gold ETFs on stock exchange terminals in trading lots of 1 gram i.e. 1 unit or higher.
An investor gets the benefit to redeem ETF units for physical gold bars as low as 10 grams. Other AMCs give an option to redeem gold ETFs at 1kg (minimum) valued at Rs 29 lakhs (approx) at present prices which makes it difficult for retail investors to redeem gold units for consumption when required.
Get pure imported gold fineness or purity of 99.5% or higher.
Investors able to buy pure gold at much cheaper rate then other available option such as banks and jewellers who charge a premium of 8% to 20% premium over spot prices.
MOSt gold shares is supported by Riddhi Siddhi Bullions Ltd (RSBL), as primary authorized participants and market makers. RSBL is one of the largest bullion dealers in India and operates RSBL spot for gold and silver trading OTC systems across the world markets.
Initially, delivery centers will be available in four cities like Mumbai, Ahmedabad, Bangalore and Hyderabad. Then by end of this year it will cover 22 cities with pan India presence.
Units of MOSt gold shares are not liable for wealth tax unlike physical gold.
No entry and exit load
No storage and security issues for investors

Key risk factors

Fluctuations in the price of gold could adversely affect investment value of units.
The returns from physical gold in which the scheme invests may underperform returns from the securities or other asset classes.
Changes in regulations relating to import and export of gold or gold jewellery (includes customs duty, sales tax, etc) may affect the ability of the scheme to buy / sell gold against the purchase and redemption requests received.
Any change in the rates of indirect taxation would affect the valuation of the scheme.
Though this is an open-ended scheme, it would ordinarily repurchase unit in minimum size, presently 10 units of MOSt gold shares. Thus unit holdings less than the minimum size can be sold through the secondary market on NSE/BSE.

Key drivers for rise in gold prices

Quantitative easing by government in western countries to reduce the debts.
Globally, hedge funds, ETFs and mutual funds are driving up investment demand for gold.
Central banks are increasing reserves of gold aggressively across the world.

Post NFO

The units of this scheme will be listed on both NSE & BSE. So, investors can buy/sell the scheme units through their trading accounts with their broker/sub-brokers at the price quoted on stock exchanges. The minimum number of units that can be bought or sold is one unit (i.e. 1 gram).

The units of the scheme can also be directly bought or sold with AMC in lot of 10 units (10 grams) and multiples of 10 units (10 grams) thereof.

Conclusion

Gold ETFs gave return of 28% (approx.) in the last one year vis-a-vis equity funds that gave returns of 21% (approx.). So, to gain an advantage of appreciating price of gold led by demand and its consumption an investor should opt to have gold ETFs in their portfolio. Since, MOSt Gold shares are available in smaller lots to buy or sell and ease in redemption is an added advantage compare to other gold ETF schemes floating in the market.

Author

Hiral Thanawala is a PGDM (Finance) graduate and Certified Financial Planner. He can be reached at hiralthanawala@gmail.com