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Things to remember while buying gold ETFs
Value Research
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April 25, 2007

Since India is the largest consumer of gold, it is quite natural that the launch of the first gold-based Exchange Traded Fund would attract a lot of international attention. When the first gold ETF from the house of Benchmark Mutual Fund listed on NSE on March 19, there was much ado.

So far, the possibility of a surge in demand for the metal (gold) due to the unfolding of a large retail segment in gold investment has been unfounded. Given that the two gold ETFs (Benchmark Gold BeES and UTI Gold Share) raised close to Rs 350 crore, there is not much fear of a surge in demand just yet.

One apprehension with regard to gold ETFs was whether the promise of liquidity would actually materialise. While it is still early to draw a conclusion, preliminary data puts these fears to rest with trading activity in the fund comparable to existing ETFs.

One of the shortcomings of the ETFs launched so far is that redemption does not translate into physical delivery of the gold.

As a result, if you want to buy gold with the redemption proceeds, there will be a difference in the price quoted by the jeweller or bank and the price of the units sold by you.This is because the price of the ETF units is inclusive of expenses incurred in procuring and storing physical gold. There is also the brokerage cost of trading in the ETF.

Barring these costs, for those of you who get conned into buying jewellery as an investment, gold ETFs will definitely offer recourse.

Another benefit of the gold ETF is that it is not liable to a securities transaction tax or even a wealth tax owing to its dematerialised form. For future gold ETF new fund offers, we would advise you to compare the entry loads with the brokerage cost of buying units from the exchange.

As has been the case with the two NFOs so far, the entry loads were much higher at 2.5 per cent for UTI's Gold Share and 1.5 per cent for Benchmark's Gold BeES than the brokerage cost of buying the units from the exchange -- this could lie in the range of 0.25 � 0.75 per cent.

So for those who missed the NFO, it is just as well, with UTI Gold Share slated to hit the NSE on April 17.

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