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UTI Gold ETF � Should you Buy?

Published on Mon, Mar 12, 2007 at 12:04 | Source : Moneycontrol.com

Updated at Tue, Mar 13, 2007 at 09:11

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Gold Exchange Traded Fund or ETF is a novel concept in India and in many ways is a better way to invest in gold than buying physical gold in the form of jewellery or coins. (Read - The ABC of Exchange Traded Funds)

After Benchmark Mutual Fund, now UTI MF has launched its Gold ETF, an open-ended exchange traded fund that endeavours to provide returns that (before expenses) closely track the performance and yield of Gold. (View - New Fund Offers open NOW)

"Gold serves as an excellent hedge against inflation and as in the current economic climate where inflation is rising this is one of the best times to take exposure to gold. In any case, at all times, it is prudent to have at least 10% to 15% of one's portfolio invested in gold", says Investment expert Sandeep Shanbhag.

Experts are unanimous that there are several advantages of investing in GOLD ETFs:

No hassles of safety
No resale concerns
Quality Assurance
No making charges
More tax efficient in absence of wealth tax and long-term capital gains tax

"Also for a retail investor, this is an excellent liquidity tool as even one unit can be bought on the exchange. On the other hand to buying ornaments or jewellery requires the allocation of a substantial sum of money", added Shanbhag.

What kind of returns should one expect from Gold ETFs?

Advisor Hemant Rustagi says, "The price of gold can be volatile at times and can move suddenly without any warning. A Gold ETF does not change this characteristic of gold, however, it does provide a simple and efficient way to trade out of the gold positions without the hassles of selling the physical gold." Also, he highlights that for a long-term investor, equity funds can give better returns compared to a gold fund."

Advisor Sanjay Matai adds, "Traditionally, Gold has been a hedge against inflation in the long run. So one may accordingly expect returns of 5-7% p.a."

Commenting on the returns aspect, Fund Manager of UTI Gold ETF, Vineet Lakhotia says, "Over a period of 10 years, Gold has given an annualized return of 8.84%." Having said that, he adds, "Having gold in ones portfolio helps in diversifying the total risk of the portfolio."

Invest in the New Fund Offer (NFO) or Buy it from the market?

Matai says, "The entry load in the UTI Gold ETF NFO is 2.5%. If your broker charges a lower brokerage and the difference between buy and sell rates is not very high, buying from the market will work out much cheaper. Second, you would get faster credit when buying from the market. In NFO you may have to wait for about a month. Third, the minimum amount in UTI NFO is Rs. 20,000. If someone wants to invest lesser amount, he can only buy when it gets listed." (Check out - Upcoming MF Offers)

Commenting on the same, fund manager Lakhotia clarifies, "Investors will not have to wait for one month, units will be allotted within 15 days from the closing date of NFO. Therefore an investor may loose on the potential upside if gold prices increase between the allotment date and listing."

To Sum up:

With advantages such as lack of making charges, impurity risk, resale hassles, absence of wealth tax and long-term capital gains tax, experts believe that investors can invest a small part of their portfolio in this fund for the purpose of diversification and hedging.

Shanbhag says, "I believe the Gold ETF is one of the best innovations (as far as mutual funds are concerned) that has happened in India in recent times and Indian investors should embrace and encourage such innovation with open arms."

- Reena Prince