Get the sheen back on your portfolio

The absence of wealth tax and securities transaction tax makes this a good investment proposition.

Indians have an insatiable appetite for gold. It's not surprising that we account for more than 20 per cent of the world's gold demand.Gold, as an asset class, lies somewhere in between the glamourous equity and staid debt.

Its prices are linked to global factors and the greenback. Gold is considered to be a neutral currency as it cannot be printed by central banks, but a good hedge against inflation.

While returns on its investments have been a modest 8 per cent over the last 10 years, in the last one year they have surged to 15 per cent on the back of a good rally.

Speculative trading in gold is not an activity undertaken by retail investors because of two major reasons: First, concerns regarding purity and the second, predicament of physical storage.

But thanks to exchange traded funds (ETFs), retail investors can now dabble in the precious metal. Benchmark Mutual Fund and UTI Mutual Fund have launched new fund offers under this category. Benchmark has launched Gold BeES, while UTI has launched UTI Gold ETF.

What are exchange traded mutual funds?

Exchange traded mutual funds are units that can be brought and sold on the exchange. The biggest advantage is lower costs because asset management companies do not have to incur any distribution costs to sell their units on an ongoing basis.

How will a gold exchange traded fund work?

The underlying asset in the case of this scheme is the precious metal. The fund will aim to capture the price movement of landed gold in India after accounting for expenses.

For these two schemes, one unit will represent the value of 1 gm of gold of internationally accepted purity standard. The NAVs will move with the price of gold and is easy to track because there will be nothing else in the portfolio except for a small percentage of cash or cash equivalent.

The fund manager buys physical gold and hands it over to the custodian to manage the same. It will be traded on the exchange like any other share.

Authorised participants are large investors who will enact the role of market makers. If there is an arbitrage opportunity between the price of gold locally and the price of gold units quoted in the exchange they will jump in to keep the price in line and provide liquidity of these "gold units".

What is the tax impact?

Investment in gold ETF is treated on a par with debt mutual funds. Short term capital gains (less than 1 year) will be added to your income and taxed at a marginal rate.

Long term capital gains (more than 1 year) will be taxed at 10 per cent without indexation and 20 per cent with indexation benefits. No securities transaction tax will be levied.

The biggest plus is the non-inclusion of Gold ETF under wealth tax ambit. Currently, if you hold physical gold, jewels and other specified assets in excess of Rs15 lakh you have to pay wealth tax.

In other words, investors have to pay the government merely for acquiring and hoarding wealth in specified assets. Gold and their ornaments are a part of those specified assets.

If you hold gold in dematerialised form, as in gold ETF, you pay tax when you realise profit like any other security. Again, long term capital gains is defined as holdings of over a year against three years in physical form.

Should I invest in the NFO or on listing?

At the time of NFO, fund houses charge an entry load. Benchmark charges 1.5 per cent for investments below Rs 50 lakh and UTI 2.5 per cent for investments below Rs 50 lakh.

It is definitely cheaper to buy these units after listing because you will have to pay only the brokerage to your broker which may be between 0.5 per cent to 0.75 per cent.

The downside is that if gold prices move up substantially between the NFO time and listing which is about 15-20 days after closing date you may have to pay a higher price to acquire the units.

On the other hand, you may end up with the twin benefit of a lower price and entry expense if gold move downwards.It is a call which you have to take.

Gold brings to the table its universal acceptance and measurable standardised quality standards. It's a valuable portfolio diversifier because of its non-correlation to other assets.

But, as mentioned earlier, returns across a longer period have been respectable and not breathtaking. It usually protects capital and gives moderate returns. It may reflect a bull run intermittently, but this can be realised only if you get your trading calls right.

Remember you will need to have a demat and trading account with a stockbroker for trading in gold ETFs.

(The writer is head of mutual funds at Derivium Capital and can be contacted at akshah@deriviumcap.com )