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Gold ETF - PDF

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									rupeshkanabar@gmail.com

Gold Exchange Traded Fund (ETF)
Defining Gold: What is Gold - Yellow Metal or Paper? We have always loved gold! Historically at least 3-4000 years ago gold finds mention. Most people love gold, and India is a huge user of gold - mostly in the form of jewellery. Here we are talking of buying gold - more as an investment rather than usage (jewellery is not an investment asset, it is an usage asset). Gold has to be bought, held and then sold - like any other form of investment. Today you have an option of how to buy and hold gold. Gold is seen as an important part of a personal portfolio - reserve banks of the world also hold it in their portfolio. Does it have a correlation to equities, currencies or other commodities like oil? Is difficult to say and far more difficult to prove. However, as an investment option a small portion of gold - say 10% is what many retail investors have or would like to have in their portfolio. Over the past say 30 years gold would have underperformed bank fixed deposits, but over the past 8-12 months it may have conveniently beaten the equity indices. There are three ways of buying gold: Physical gold Gold ETF (Exchange Traded Fund) Gold in demat form

Physical gold (Yellow Metal) The oldest method of buying and storing gold - it has its advantages and disadvantages. The biggest advantage is most of these purchases can be done in cash and thus one`s unaccounted money gets deployed. Here as a customer you go to a jeweler and he sells gold at a price mentioned (displayed) in the shop. The jeweler also buys it back at a later date. However the whole process is a little inefficient, and the transaction cost makes it a little unattractive as an investment option. However it is still perhaps the most common way and popular way of gold investment. Gold ETFs (Paper) Gold Exchange Traded funds (ETFs) offer investors an innovative, costefficient and secure way to access the gold market. Gold ETF is intended to offer investors a means of participating in the gold bullion market through Stock Exchanges without taking physical delivery of gold.

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The investment objective of Gold ETF is to provide returns that closely correspond to the returns provided by domestic price of gold through physical gold. Gold ETFs offer investors a convenient means to invest in gold without the hassles of storage; also it spares investors of the concerns regarding the quality of gold and also lowers transaction cost. To buy an ETF from the exchange, you would pay a brokerage - charge of sum percentage depending on your broker, whereas if you buy it at a NFO you would end up paying an entry load. Gold in demat form You need to have a brokerage account with a commodity broker - so that you can buy the gold and hold it in demat form. Obviously you can then sell it, hold it, pledge it, like you can do with any other asset. Which is the best option? As an investor, we tend to buy physical gold in the form of coins, bars and jewellery as this is the traditional way to invest in gold. You could buy gold in the form of jewellery but if you wish to invest into gold for the long term then buying physical gold may not be an ideal option. Physical gold typically comes with drawbacks like concerns on purity, cost of storage and security. The most authentic source of gold is buying through banks, which certify its authenticity but cost 8-10% more than local jeweler. If you want gold as an investment, you will most likely be better off with options such as gold funds. Since these funds invest their corpus into gold, they mirror the performance of spot gold. Your holding in these funds is denoted in units, transferred to your demat account and listed on the stock exchange just like in local equities. While investing in listed Gold ETFs investors have to pay a brokerage to the broker which varies from broker to broker. Also as investors have to open a demat and trading account with the broker they have to pay annual charges to maintain these accounts which again varies from broker to broker.

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Tax Implications Gold ETFs are more tax-efficient than physical gold. If held for more than a year, these funds qualify for a long-term capital gains tax (LTCG) of 10% compared to a three-year holding period for physical gold after which it qualifies for LTCG tax at the applicable tax rate. Also, holding physical gold of more than Rs 1.5 million attracts a wealth tax of 1% of the gold value at the end of every year. Factors to be considered before Investing in Gold You need to be very careful about investing in gold because unlike stock or other markets you don't have the option of investing a small amount. You must do lot of research and have a strong knowledge about the market information. You must decide how you are going to allocate it in the portfolio. Some investors choose to invest only in gold and not in any other sources. However this practice won't be suitable for all. Therefore you must first check up if you are falling under this category. Some other issues that are to be considered are as follows: Factors that Influence Gold Price Like any other resource the supply and demand constitutes to be an important factor in determining the price of gold. Since gold is a precious asset people even hoard it and its demand and price could increase drastically during inflation and even when there are wars. The price of gold shows an upward trend in most cases irrespective of the consequences due to the sentiment which people owe to the metal. They are prepared to pay any price for it. Gold Investment Strategies Some of the investors prefer to buy gold when the price increases because of the popular belief that it will increase further more and they can make profits by selling them thereafter. Other investors choose to buy gold when prices decline so that they can sell them at a higher profit when the prices increase. Another group of investors will make their decisions by testing if the current trend in pricing changes or not. Gold is an all season investment avenue. It is better to invest some percentage of your investments into this asset class. This is the best way of hedging to the inflation risk.

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