What is the Gold ETF and why should you invest in it?
Ramya Rao is a designer and loves fashion and gold jewellery. She wants to stay on top of the latest trends and she knows how to make a statement.
For the last three years, she has been following family tradition and has been purchasing a small amount of gold for Dhanteras with the savings left in her account at the end of the month. She thinks she finally has enough gold available for her to exchange it for a small bracelet.
Having experienced these benefits, starting this Diwali she wants to save a little bit every month to purchase more jewellery in the future. But she hated the fact that she lost over 5% of the value by exchanging jewellery for jewellery. Knowing little about investing in gold she decided to seek advice from her parents.
Ramya’s mom took her to her favourite jewellery shop and introduced her to their gold savings scheme. The scheme basically involves paying the jewellery shop a little bit of money every month (like a SIP or EMI) and at the end of a year or two, she gets to pick the jewellery she wants from the shop that is equivalent to the gold she saved up.
Ramya really loved one particular aspect of scheme — when she makes a contribution every month, that contribution is recorded in grams of gold and so the weight remains locked in. For example, if her first month contribution is Rs. 3,000 and the price of 10 grams of gold is 30,000, her pass book would reflect 1 gram of gold. So she keeps accumulating grams. When she finally buys gold jewellery that weighs 100 grams, at which point the market price is say Rs. 60,000 for 10 grams, she would have actually paid much less than the 6 lacs required as she started saving when the price was only Rs. 30,000.
But she had a couple of serious issues with the scheme too. She was not sure that particular shop will stock the exact pieces and designs she will want in the future. She might want to buy something from a different shop or even get something from Dubai. If she starts saving with this shop, she loses that flexibility. The second concern she had was for the safety of her money. What if she saves for 23 months and the shop shuts down right when she was supposed to purchase her jewellery? She would lose everything!
Ramya then asked her father the same question. Mr. Rao, being very conservative, was quite concerned about his daughter locking up all her savings in gold. He counseled her that she should just save all her money in FDs and purchase gold only when she needs to. He also insisted that she get a locker with the bank and keep all her gold there as it is not safe at home. Ramya, however was not keen on doing that. Getting a locker with a bank is so old fashioned and just too much trouble. Gold prices have always increased faster than FDs and she knows that the amount of gold she will get ultimately will be less if she took her father’s advice.
That is when she ran into Anusha Chari, a fellow designer and her fashion role model. Anusha’s style is invariably on trend — she always seems to have enough saved up to buy into the latest rage. So, Ramya decided to ask Anusha how she manages to get it right every time.
Anusha introduced Ramya to the Gold ETF. She told her that she puts away any extra money she has into a Gold ETF. This, she said, works exactly like the jewellery shop scheme — she locks in the weight of the gold whenever she buys the Gold ETF and that she can buy gold worth as little as Rs. 300 at a time. The Gold ETF also addresses the concerns her dad had. You can sell your holdings and get your money back in 2 days and there are no making charges or any risk of someone stealing it either!
So how exactly does the Gold ETF work?
Now imagine 10,000 people just like Ramya who have about Rs. 3,000 they want to save in gold. They pool their Rs. 3,000 each and put it in a trust where it is safe. Now with the Rs. 3 crores in the trust, they purchase 10 Kilos (Rs. 30,000 for 10 grams) of 24 carat gold bars and keep it with the trust.
Now, 10,000 shares are created in this trust and each person gets one share each. Ramya gets one share in the trust too. This effectively represents 1 gram out of the 10 kg of gold in the trust. Now, if the price of gold goes up to Rs. 40,000, the value of the share that Ramya owns goes up to Rs. 4,000. Let us assume she purchased 10 such shares (10 grams) when the price of this amount of gold was Rs. 30,000. When she sells her shares, when the gold price is at Rs. 40,000, she gets Rs. 40,000 back and she can buy jewellery worth 10 grams.
To facilitate buying and selling these shares, they have been listed on both NSE and BSE stock exchanges. ETF expands to Exchange Traded Funds and they are called so because you can buy and sell these funds on stock exchanges. So once you have a brokerage account, you don’t need to step out of your house to invest in gold.
The companies that create and run these ETFs are some of the biggest financial institutions in India. Companies like ICICI, Kotak, HDFC, etc. all sell Gold ETFs. So, buying their ETF is as safe as putting your gold in a locker in one of these banks.
Gold ETFs are the safest, cheapest and the most flexible way of saving in gold.
Read More: How can you invest wisely?
