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What are exchange-traded funds?
Exchange-traded funds (ETFs) are mutual fund schemes that are
listed and traded on exchanges like stocks. ETFs trading value is
based on the net asset value (NAV) of the assets it represents.
Generally, ETFs invest in a basket of stocks and try to replicate
a stock market index such as the S&P CNX Nifty or BSE Sensex,
a market sector such as energy or technology, or a commodity such
as gold or petroleum.
Recently, the Securities and Exchange Board of India (Sebi)
amended its regulations and allowed mutual funds launch gold
exchange-traded funds (GETFs) in India. Two mutual funds, UTI
mutual fund and Benchmark Mutual Fund, are set to launch GETEs in
a few days. These funds would be listed on the National Stock
Exchange (NSE).
What are gold exchange-traded funds?
A gold-exchange traded fund unit is like a mutual fund unit
backed by gold as the underlying asset and would be held mostly in
demat form. An investor would get a securities certificate issued
by the mutual fund running the Gold-ETF defining the ownership of
a particular amount of gold. GETFs are designed to offer investors
a means of participating in the gold bullion market without the
necessity of taking physical delivery of gold, and to buy and sell
through trading of a security on a stock exchange.
With gold being one of the important asset classes, GETFs
will provide a better, simpler and affordable method of investing
as compared to other investment methods like bullion, gold coins,
gold futures, or jewellery.
Advantages of GETFs
·
No risk of holding physical stock: As GETFs are issued in demat form, the risk associated
with holding physical gold is reduced considerably.
·
Affordable:
GETFs are ideal for small retain investors as they can buy a just
one unit from the exchange. The minimum amount of investment
during the NFO period for Cash is Rs 10,000 and in multiples of Rs
1,000 thereafter. One unit of the fund will represent one gram of
gold.
·
High Liquidity:
GETFs can be easily bought / sold like any other stock on the
exchange during market hours at real-time prices as opposed to end
of day prices.
·
Lower cost:
GETFs enjoy the benefits of lower cost and higher
transparency. As they are listed on the exchange, costs of
distribution are much lower. Further, exchange traded mechanism
helps reduce minimal collection, disbursement and other processing
charges. Gold futures include the cost of carry that will be
absent on a GETF.
·
Low tracking error: Tracking Error of GETFs is likely to be low as compared to a normal
fund. Due to the creation / redemption of units only through
in-kind mechanism the fund can keep lesser funds in cash. Also,
time lag between buying / selling units and the underlying
physical gold is much lower.
Conclusion
India is the world's biggest consumer of gold, consuming
700-800 tonnes annually, the majority of which is used for
jewellery. Gold ETFs are expected to be popular as investment-led
buying for gold has pushed aside some of the demand for gold
jewellery. Buying jewellery as an investment in gold can be
expensive as charges in the form of making, storage and other
services tend to increase the cost, while gold-ETFs can be an
effective invest tool to help one build significant wealth over
time.
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