Now that the gold exchange traded funds (GETFs) are being sold in the market, let's look at a few things to understand them better.

There are only two GETF products available in the market right now.

While Benchmark Mutual Fund's Benchmark Gold BeEs (Benchmark Exchange Traded Scheme) has closed for subscription on February 23, UTI Mutual Fund's UTI Gold ETF will open on March 1 and close on March 12.

These GETFs will be buying gold for you, with your money, and converting it into paper. This paper, which may be in a physical, or dematerialised, form, is called a unit.

A unit of a mutual fund is exactly like the share/ stock of a company; it can be bought and sold in the stock exchange.

Benchmark Gold BeES is tentatively scheduled for listing by March 15-20 and UTI Gold ETF is scheduled to debut on the NSE by April 8.

While investors had the option of investing a minimum of Rs 10,000 in Benchmark Gold BeEs, they will have to fork out a minimum of Rs 20,000 to apply for UTI Gold ETF.

How many units will I get?

Cost of one unit of GETF = Cost of one gram of gold on the date of allotment.

This is the standard adopted by both the schemes mentioned above.

Assume that the date of allotment is March 12 and the cost of one gram of GETF then is Rs 1,000.

Ideally, you must get 10 units of GETF. However, this is not the case.

Most mutual fund schemes impose a kind of tax called 'load' while buying or selling units. The former is called 'entry load' and the latter is called 'exit load'.

• Now, a golden mutual fund

Let us factor in the entry load of 2.5 per cent for UTI Gold ETF where the minimum investment is Rs 20,000. Again let's assume that the price of gold on the day of allotment is Rs 1,000.

In this case, the cost of one unit will be Rs 1,000 plus the entry load of 2.5 per cent. This works out to Rs 1,025 per unit accounting for the entry load of Rs 25 (2.5 per cent of Rs 1,000).

Hence you will get only 19.5 units (Rs 20,000/Rs 1,025) of UTI Gold ETF instead of 20 units because of the 2.5 per cent entry load.

For Benchmark Gold BeES, however, the entry load was only 1.5 per cent that is Rs 15 per Rs 1,000. This translates into Rs 1,015 per unit.

Rs 20,000 invested in this scheme during the offer then would have fetched you only 19.7 (Rs 20,000/Rs 1,015) units.

Interestingly, both the schemes do not levy any entry load when these GETFs start trading on the NSE.

In this case, won't it make sense to buy them on listing then?

Well, it will depend on the price of gold on the date of allotment.

It will make sense only if the price of gold on the day of listing plus the brokerage charges (Rs 4 to Rs 6 per Rs 1,000; yes there are brokerage charges) is less than when you would have bought it during the offer period plus the entry load.

However, your bet will go wrong if the price of one gram of gold is more than Rs 1,025 after listing.

This is not to say that gold prices will move only in one direction. They can also drop when the units are available for trading on the NSE.

How will I trade in GETFs?

Just like you trade in shares. You will need to have a demat account. Also, you need to register yourself with a broker having membership of the NSE.

Once these GETFs are listed the daily movement in their prices can be checked online like the way you keep track of your equity portfolio.

• A demat account: What's in it for you 

The price of GETF unit will track the price of physical gold in the international market like the London Bullion Market association.

Listing on the NSE will help the buyers and sellers meet on a single platform for trading in GETFs. This will enable them convert their units into cash easily.

Will there be brokerage charges?

Your broker will not let you trade in GETFs for free. You will have to pay a small brokerage fee for using his trading platform.

Thankfully, the brokerage charges here are not too high. They will range from 0.4 per cent to 0.6 per cent of your transaction value.

You will be paying Rs 4 to Rs 6 as brokerage charges if you buy units worth Rs 10,000.

Will I have to pay any tax?

Yes and no.

Since GETFs are being sold as non-equity (there is no buying/selling of shares) schemes there will be dividend distribution tax (DDT) you will have to contend with.

That is dividend will be taxable in the hands of investors if and when these GETFs declare dividends. Simply put, dividend is money distributed to unit holders if the scheme declares a profit.

Current law stipulates DDT of a shade over 14 per cent for individual investors and a shade below 22.5 per cent for corporate investors. This tax is inclusive of surcharge and education cess (a type of tax).

• Benefits of sequencing tax deductions

However, the good news is there will be no wealth tax or securities transaction tax, STT, to contend with when you sell your GETFs.

There is no STT because this is a non-equity scheme. STT is applicable only when shares are bought or sold.

The case for wealth tax would have existed if you were in possession of gold in physical form. The magic of GETFs lies in this. They convert your money into gold which again is converted into units in demat form.

So as a matter of fact you don't own gold in physical form. Hence there is no wealth tax.

Who will guarantee the purity of gold bought?

Of course, it will be the custodians appointed by both Benchmark Mutual Fund and UTI Mutual Fund. Both the mutual funds have appointed the Bank of Nova Scotia as the custodian (safe keeper) for the gold bought on behalf of investors.

The amount of physical gold held by the custodians in both these schemes will be of fineness (purity) of 99 parts per 1000. In other words, this gold will be 99.5 per cent pure. We call this degree of purity as 24 carat gold in general parlance.

What's more the gold held with the custodian will be fully insured and will not be used for lending.