James Grant puts it, “Nothing beats a little cash in a bear market and the oldest form of cash is gold.”
When markets are erratic and times are unpredictable, the wise thing to do is to step up exposure to an asset that would infuse a semblance of stability and strength in the portfolio.
The simplest and best way to do this is to invest in a gold exchange traded fund(ETF).
ETFs are essentially index funds listed on the exchange. You can buy and sell them just like you would buy and sell a share. In a gold ETF, the underlying asset is standard gold bullion (99.5% purity).
In other words, a gold ETF is just like any other mutual fund scheme - the only difference being, instead of being invested in equity shares, the monies collected are invested in gold.
Generally, the price of one unit represents approximately one gram of gold. And since these are passively managed funds, the NAV will basically track the price of gold in the open market.
Currently there are three gold ETFs listed in the market —- Gold BeES, Kotak Gold ETF and UTI Gold ETF. Reliance MF has an ongoing NFO, post which, the units would be listed to begin with on the NSE.
Now, in a country where gold worth over Rs 70,000 crore per annum is sold in the form of jewellery, coins, biscuits and bars, the total assets under management (AUM) of these schemes amount to just around Rs 325 crore.
This clearly suggests that investors are either unaware or uncomfortable with buying gold in the electronic form.
A change of mindset is needed and it shouldn’t really be that difficult, given that we already own other equally valuable assets in a similar form.
Think of the money in your bank. Whether you have Rs 10,000 or Rs 10 lakh or over a crore, the physical cash is not lying in your safe — your bank passbook indicates the amount you own.
Similarly, there was a time, not too long ago, when physical share certificates needed to be delivered and stored. Then we shifted to electronic holding and an investor’s life was never more convenient.
Similarly, gold can also be held in the dematerialised, electronic form, which is a safer and more efficient way of owning it.
For starters, there is no doubt on the purity — you can’t get purer gold even if you tried and you don’t even have to depend upon human honesty or scruples. With a gold ETF, impurity risk is non-existent.
Security is, of course, taken care of by the fund, unlike in the case of jewellery or other forms of physical gold, where the threat of theft always looms large.
Coming to denomination, one can literally buy one gram at a time.
Though a traditional SIP, as we understand it, is not possible in the case of gold ETFs, one of my friends has been diligently picking up 10 grams of gold per month from mid-March onwards (when the first ETF was made available) and by now, he is already the proud owner of 70 grams of the highest quality gold.
When it comes to selling back, the making charges of jewellery cannot be recovered. In fact, it is generally bought back at a discounted price. Coins and bars also suffer from similar problems.
Units of gold ETFs, on the other hand, can be sold by either a call to your broker or with a few clicks of your mouse, if you have an online trading account.
The tax benefits round off the manifold advantages of holding gold in the electronic form — it is free of wealth tax and subject to long-term capital gains tax of 10% as against 20% in case of physical gold.
To sum it up Gold prices have spurted by almost 12% in the last two months, leading to a corresponding rise in the NAVs of the gold ETFs.
However, investors shouldn’t look at gold on the basis of returns in a particular period.
This investment is essentially a hedge against inflation and its quality of negative correlation with other asset classes like stocks, fixed income securities and commodities during uncertain times.
Like Karl Marx put it, “Although gold and silver are not by nature money, money is by nature gold and silver.” At the end of the day, bullion is more important than the billion