Investment in Gold Exchange Traded Funds (Gold ETF): A Safe and Novel Approach to Investment in Gold Dr. Joshy Andrews Assistant Professor, St.Aloysius College Edathua, Alapuzha Mail: andrewsjoshy@gmail.com ABSTRACT Gold is always a thrilling and time tested investment option for a genuine Indian investor. Among the different investment opportunities available in gold and bullion markets, Exchange traded funds counts superior. In many aspects, Gold ETFs are more investor friendly and cost effective compared to direct investment in gold and bullion. This study is an indepth analysis of gold exchange traded funds available in India. The first stage of the study is a comparison of performance of various Gold ETFs available in India. Another angle of study is how superior the investment in Gold ETFs are than investment in physical form of Gold. It covers the dynamics of Gold ETF Market in India. Introduction Gold is always considered as one of the best investment alternatives available with a common Indian investor. Indians have considered investment in gold as a traditional method of investment. As world s top consumer of gold, India accounts for 20% of world gold demand. If we consider the price growth of gold since 2001, it has risen by as much as 450%. As the importance of gold investment increased due to extreme volatility in the financial markets, economic uncertainty and fears that national currencies will lose their value etc. forced the investment in gold. It is mainly because gold is always considered as the best means to hedge against market volatility. As its importance increased in the investment arena, gold is nowadays measured equivalent to investment opportunities in the mainstream financial markets. The Demand Scenario According to the World Gold Council(WGC), India's gold import, which had already exceeded 2009 levels, is likely to cross the 750-tonne mark this year due to increasing consumer demand for jewellery despite soaring prices. As per their estimates, the gold imports would cross the 750- tonne mark this year, a level earlier achieved in 2007. In 2009, the total import of gold stood at 559 tonnes. In Q3 2010, India, the world's largest consumer of the yellow metal, has bought 214 tonnes of gold compared to 176 tonnes in the same quarter in 2009. It is a very good sign that the demand side is shooting up and give a confident signal to investors that the trend in gold prices is not a bubble. India s position in the world pool is shown in the following table. 1
Price Trends (Rounded Figures) India (In Tons) World (In Tons) % Share Total Stocks 13000 145000 9 Central Bank holding 400 28000 1.4 Annual Production 2 2600 0.08 Annual Recycling 100-300 1100-1200 13 Annual Demand 800 3700 22 Annual Imports 600 Annual Exports 60 Source: http://finance.indiamart.com/markets/commodity/gold.html As an investment opportunity, gold need to be considered as a long term investment option. It is because the increase in prices of gold always happens on a long term basis. It is imperative that gold prices will increase over long period of time. Analyzing the history of fluctuation in gold prices, it has shown fall in prices many times but the fall had only a temporary effect of short period of time ranging from 1 month to 2 years. In the long run, the price of gold always showed increasing trend as well as stability in value. It is because of the supply and demand mismatch in gold. The world supply of gold is almost stable but the demand of gold has increased all over the world. Considering as the biggest gold consumer in the world, the income level of an average Indian has increased overtime. At the same time, the saving population as well as purchasing power of investors of our country has also increased during the period. These reasons keep the value of gold soaring. There are many reasons for the present skyrocketing of prices of gold. One of the reason is as mentioned earlier, the reason of supply and demand mismatch. Another reason is the Quantitative Easing2(QE2). Federal Reserve of US has been providing US dollar liquidity or availability since the start of financial crisis from 2008 onwards. The liquidity or availability provided here is called Quantitative Easing (QE). Federal Reserve of US is providing new US dollar liquidity or availability from Nov-2010 onwards. The fresh round of US dollar liquidity or availability from November 2010 is being called as phase 2 of Quantitative Easing (QE2). This move will cause further increase in supply of dollars which leads more spending or consumption by individuals and in turn will increase prices of goods thereby causing inflation. The rise in inflation will cause fall in the value of US dollar. The fall in US dollar will cause increase in price of gold, as gold price globally is quoted in US dollar. So in medium term also the probability of rise in price of gold is very high. If we analyze the price of gold with dollar value, we can see that there is an inverse relationship between the two. It is evident from the following graph. 2
Source: http://seekingalpha.com If the traditional way of gold investment was in ornaments, new investors opt for gold coins and biscuits. Banks and other financial institutions were offered gold coins of specific weights and purity. The Indian postal services recently introduced the same and attracted the gold thirst of common people. Gold Exchange Traded Funds(Gold ETFs) Exchange Traded funds are instruments which are traded like shares which are backed by physical holding of the commodity. These are open-ended mutual fund schemes which invest the pooled money in standard gold of 0.995 purity. The first ETF launched in India towards the end of 2001 by Benchmark Asset Management Company through its Nifty Benchmark Exchange- Traded Scheme(Nifty BeES). Since they are open-ended and listed on the stock-exchanges, it is possible to buy and sell them through out the days. They traded in exchanges in a small range around the value of NAV held by them. It can be considered as a hybrid of open-ended mutual funds and listed individual stocks. The working of Gold ETF is depicted in the following figure; Working of Gold ETFs 3
Source : http://www.quantumamc.com/schemesnav/gold_fund.aspx It is a new phenomenon concerned with India but getting popularity as investors become aware of investing in gold in a non material form. Comparing with physical gold, there are many advantages in investing gold ETFs. Gold ETFs allow an investor to invest in paper gold instead of physical gold. The units are issued in demat form and avoids the risk of holding physical gold. It can be easily bought and sold like any stock on the exchange through terminals spread across the country. It invests the investors money in physical gold in the same way as equity mutual funds invest in equities. The investment made by investor is in units and one unit is equivalent to 1 gram of physical gold or as the asset management company fixes. There is no separate form filling for buying or selling units. It can be done by just a phone call to the broker or a click on the net. One can buy or sell the units during the market hours at prices that are close to the NAV of the scheme. A comparison table in this connection is given below Comparison of Gold ETFs with Other Forms A comparison table is given below which compares the different parameters of investment with other forms of investment in gold. Comparison of Gold ETF with physical Gold Sl.no. Parameter Jeweler Bank Gold ETF 1 How Gold is Held Physical (jewelry) Physical (bar/coins) Dematerialized form 2 Pricing Differs from one to another neither transparent nor standard Differs from bank to bank not standard Linked to international gold prices and very transparent 3 Buying premium above gold price Likely to be more 4 Likely to be more Likely to be less
4 Making Charges Charges incurred Charges incurred No charge incurred 5 Impurity risk High Nil Nil 6 Storage requirement Locker/safe Locker/ safe Demat account 7 Security of asset Investor is responsible 8 Resale Conditional and uneconomical 9 Convenience in buying and Less convenient selling as gold needs to be moved physically 10 Quantity to buy / sell Available in standard denomination Investor is responsible Banks do not buyback Less convenient as gold needs to be moved physically Available in standard denomination Fund house take the responsibility At secondary market prices More convenient as held in electronic form under demat account Minimum is ½ or 1 gram according to the fund 11 Bid / Ask Spread Very high Can t sell back Very low 12 Risk of Theft Yes, possible Yes, Possible No, Not Possible 13 Wealth tax Yes Yes No 14 Long term capital gain tax Only after 3 years Source: HDFC MF Scheme info Document Only after 3 years After 1 year The following is a comparison of investment in gold in the most preferable routes by a common investor such as jewelry and bullion as well as coins offered by banks and other financial institutions with investment in Gold Exchange Traded funds. The standard investment here taken as 10 gm rate Comparison of Investment 10 grams of gold through different sources (value as on 12.01.2011) Source Investment required (Rs.) Jewelry* 22,462 Bank offered coins ** 22,200 Gold ETF*** 19,833 * gold rate of 24 ct. @ 1gm = 2042 and minimum making charge of 10% also added. The applicable taxes are excluded. ** SBI gold coin rate (excluding VAT and other local taxes as applicable) *** Gold ETF rate as per the NAV of Benchmark BeES (10 units) 5
Considering the above comparison table, it is clear that investment in gold in the form of jewelry and bank offered coins costs higher compared to Gold ETFs of the same value and quantity. It is 11.70% more cost to buy 10gm Jewelry compared to 10 units of Gold ETF NAV of Benchmark BeES(which is almost exactly invested in 10gm of gold) and 10.66% more cost to buy 10 gm gold coin from SBI. Ie, in both the cases, the extra cost incurred than the actual market value of gold(margin of jeweler as well as banker) is a loss to the investor if they sell back gold in times of need and at the same time he may sometimes negotiate the price with the jeweler. In case of Gold ETF, an investor can avoid this margin and at the same time he can sell his Gold ETF at a price closer to the market price of Gold. Gold ETF Schemes Available If we consider the Indian Gold Exchange Traded Fund (Gold ETF) market in India, Total 9 schemes are available at present. Among these, the funds launched by ICICI Prudential Mutual Fund House, Religare Gold ETF and HDFC Mutual Fund House are of recent origin. The various details regarding the nature of each scheme are mentioned below; Details of Gold ETFs Available in India Fund Expense Ratio Entry/Exit Load Launch date Benchmark Gold BeES 1% Nil 19 March 2007 Kotak Gold 1% Nil 27 July 2007 Quantum Gold 1.25% Nil 22 February 2008 Reliance Gold ETF 2.50% Nil 1 November 2007 Religare Gold ETF - Nil 23 February 2010 SBI Gold ETF 2.50% Nil 30 March 2009 UTI Gold ETF 1% Nil 10 April 2007 ICICI Prudential Gold 2.50% Nil 15 July ETF 2010 HDFC Gold ETF 1% Nil 25 June 2010 Pricing unit Per ½ gm of gold Proportion of Investment Gold :Current Assets 99: 09 99.61:0.31 99.91:0.09 The Average Asset Under Management(AAUM) and the Net Asset Value(NAV) of each fund available in India is given below. From the comparison is clear that the Benchmark Gold BeES occupy comparatively higher AAUM compared to other funds. If the NAV is taken into to consideration, it is almost same for different funds except Religare Gold ETF and ICICI Prudential Gold ETF. It is because almost all the funds are keeping near to 100 % of their AUM in physical gold. 6
Schemes Comparison of AAUM & NAV Average Asset Under Management (AAUM) for the quarter October December 2010 NAV (Rs. / unit) As on 14/01/2010 Benchmark Gold BeES 1,50,629.11 1971.89 Kotak Gold 24,331.66 1970.52 Quantum Gold 2,563.01 980.34 Reliance Gold ETF 34,060.53 1916.74 Religare Gold ETF 3,821.82 2026.16 SBI Gold ETF 15,548.25 2008.05 UTI Gold ETF 44,940.17 1971.15 ICICI Prudential Gold ETF 8562.31 2033.06 HDFC Gold ETF 31,529.50 2015.34 Source: Company websites As in the case of NAV, when considering periodic evaluations of return of various schemes, it is more or less same and there is no significant difference in their return. Comparison of periodic return Schemes 6 Months 1 year 2 years 3 years Since inception Benchmark Gold BeES 10.9 12 27.1 25.3 22.73 UTI Gold Share 11 12.1 26.9 25.3 23.27 Kotak Gold ETF 11 12 26.8 25.2 28.22 Reliance Gold ETF 10.9 12 26.7 24.3 24 SBI Gold ETF 11.2 11.9 N.A. N.A. 25.03 The taxation of Gold ETF is almost same as that of debt mutual funds. The most impressive tax implication in investing Gold ETFs is that it is not liable for wealth tax compared with investment in physical form. In relation to short term capital gain (STCG) tax, taxation is applicable incase of before one year and long term capital gain (LTCG)tax will be applicable after one year. Incase of Jewellery and coins, the STCG tax is applicable before 3 years and LTCG tax is applicable after three years. Tax Implications Taxation Gold ETF Jewellers Banks Wealth Tax No Yes Yes Short- term capital gain tax Long term capital gain tax Applicable before one year Applicable after one year Applicable before 3 years Applicable after 3 years Applicable before 3 years Applicable after 3 years 7
Conclusion Gold ETFs have a good future in India. Nowadays the portfolio managers advice investors to keep gold as a part of their portfolio. It is because gold always acts as a hedging tool against inflation. Keeping such a tool in the form of Gold ETF is more preferable as it will be cost effective than in physical form. In addition to that there are many advantages in investing in paper form of gold than in physical form of gold. Considering Indian investors, it is a new model of investment and needs to create awareness among the investors. Reference 1. http://finance.indiamart.com/markets/commodity/gold.html 2. http://seekingalpha.com 3. http://www.quantumamc.com/schemesnav/gold_fund.aspx 4. http://www.gold.org 5. http://www.benchmarkfunds.com 6. http://www.kotakmutual.com 7. http://www.quantumamc.com 8. http://www.reliancemutual.com 9. http://www.religaremf.com 10. http://www.sbimf.com 11. http://www.utimf.com 12. http://www.hdfcfunds.com 13. http://www.pruicici.com 8