A majority of the gold exchange traded funds listed on the stock exchanges have posted close to 20 per cent returns in the last two months when the Sensex dropped 25 per cent. A sharp rise in gold prices, both internationally as well as in the domestic market, has spurred investors to move towards this asset class.

Currently, there are five gold ETFs by Benchmark, UTI, Kotak, Quantum and Reliance [Get Quote] Mutual Fund. Gold ETFs are open-ended mutual fund schemes that invest the money collected from investors in standard gold bullion (0.995 purity). The investors' holding is denoted in units, which gets listed on a stock exchange.

Benchmark's Gold BeES or Gold Benchmark Exchange Traded Scheme has given 19.4 per cent return since May followed by UTI and Kotak's gold ETF, which have given 18.8 per cent and 19.8 per cent return respectively. Equity markets have eroded the returns for investors by over 33 per cent in 2008 while gold as an asset class has given returns of 16 per cent. Historically, whenever markets go down, gold gives positive returns.

Although physical gold is still the most preferred form of investment in gold, people are slowly realising the importance of paper gold. The price of 10 gm gold has shot up from Rs 11,400 in May to Rs 13,340 today.

Says an Indiainfoline report, "We recommend investment in Gold BeES through the systematic investment plan (SIP) route with target of $1,100 per ounce by 2008 year-end. The corresponding target for Gold BeES would be an NAV of around Rs1,500 representing upside of over 10%. The minimum tradeable size in the secondary market (Nifty) is one unit ounce."

"Investors are waking up to the fact that gold ETFs are an important diversification tool and in this falling market, it makes sense for them to go for it. We have not seen any profit booking. Rather, investors are coming in, realising the spiralling prices of gold," said a fund manager with a leading gold ETF.

On tax treatment, the Indiainfoline note said that gold BeES is treated like a debt fund. So, the tax incidence on sale of gold BeES is similar to that on sale of debt funds. "Hence, long-term capital gains tax is lower of 10 per cent without indexation or 20 per cent with indexation. Short-term capital gains is added to the income and taxed at the marginal income-tax rate," it said.

Also, units held under the scheme will not be treated as assets as defined under the Wealth Tax Act and would not be liable to wealth tax.

A sharp rise in crude oil prices and sub-prime woes have made investors more risk averse, prompting them to turn to safer investment avenues such as gold. The weakening dollar and falling interest in dollar-based assets have encouraged investors to shy away from the US currency and turn to gold as a safer asset. It is also an effective hedge gainst inflation.

Says Devendra Nevgi, Chief Investment Officer, Quantum Mutual fund, "There is a demand-supply mismatch related to gold as a commodity as well. Globally, supply has become less because of rise in mining costs and overall consumption is going up on account of growing disposable incomes. In the next few months, with inflation at such levels, gold ETFs should do well."