I have not provided much information regarding ETF which is Exchange Traded Funds. I will write more about it in the future articles. As you are aware because of the inflation the investments are just eroded. In such a scenario, most of the investment options seem to be very scary. In reality there are very few options to the investor which can ward off the negative impact of the inflation.
Gold is one such asset which has historically done well during periods of high inflation. This is because during such times investors shift their holdings toward hard assets as the purchasing power of paper money starts dwindling.
I had written previously about gold. I had written about gold giving handsome returns. I wish to bring to your notice one more observation that I made. When US underwent a major recession during 1977, the average inflation shot up from 6.5% in 1977 to 13.58% in 1980, the average annual price of gold also zoomed from $147 to $615. Once inflation was brought under control post-1980, the price of gold also started receding.
So you might be wondering why I am advocating too much about gold, I was doing a small analysis before getting this into picture. Investing directly in bullion has too many issues and hassles like storage and security. If you have loads of gold then you will attract unwanted attraction which is not advisable. It is not worthy investment to invest in gold jewelry because there is considerable difference between the price and the value of the gold. What I mean by price and value is, when you purchase gold jewelry, the jewelers generally charge for wastage and making charges which is considerable amount. I had bought a gold chain which was around 16 gms and the price of gold per gram at that time was Rs. 1200 and the cost of chain was Rs.21k where as the actual price of gold (value) is 19k. When you sell the gold you will get the amount for only 16 gms and it won’t include the making charges and wastage.
So in order to counter these issues, it is better to invest in gold exchange traded funds. Gold ETFs can be easily traded on the stock exchange at a transparent price and in convenient denominations, making it a more liquid investment as compared to gold bullion.
Gold ETFs are open-ended mutual funds that put your money in physical gold and issue unites to you in demat form. They are listed on the NSE and can be purchased and sold on the exchange just as you buy and sell equity shares using the trading platform. Each unit is backed by the physical gold held by the custodian of the scheme. Each unit represents approximately 1 gm or ½ gm of gold.
Another advantage is that investments through ETFs do not attract wealth tax provisions. Capital gains in gold ETF units are exempt if held for more than one year and later sold. Short term capital gains tax (tax bracket under which the investor falls) is applicable if units are sold within one year.
There are currently five gold ETFs in the market – Benchmark Gold BeEs, UTI Gold ETF, Kotak Gold ETF, Reliance Gold ETF and Quantum Gold ETF – listed on the NSE. Each of these funds has an average 25 percent annual return. Benchmark was the first to launch gold ETF in March 2007 and has yielded 18 percent annualized return since inception.