Devendra Nevgi
Investing in gold funds and ETFs could be better than physical purchases of the metal
Strolling down Zaveri Bazaar on a Sunday afternoon, I noticed the array of jewellery shops that were still open. Most of them had a few things in common — mirrors all around and an electronic price board showing the price of one tola (10 gm) of gold or the computer screen flashing the last traded price of gold and foreign exchange. There were minor differences in the prices offered.
That’s when a signboard caught my eye. It was a stock broker’s office, sitting in the Mecca of gold markets in Mumbai and it read, “Gold available here.”
Curious to find out know how a stock broker could be selling gold, I came back next day. There was no gold and no mirrors inside, just a stock trading screen. I hauled up the guy in the office and said, “You have put up a wrong signboard.” The guy smiled and said “Sir, gold is available here, but not in physical form, it’s in demat form, like any other stock.” I was taken aback.
I poked him to get some more details. “Go to your broker’s office and buy a low-cost gold exchange traded fund,” he advised me.
I asked him what a gold ETF was. “You buy gold like you buy stocks on exchanges. When you buy ETFs, the fund, in turn, buys physical gold and stores it in safe vaults run by global investment banks. The units are credited to your demat account. So if the gold prices move up or down, the listed price of the ETF will also move up or down more or less in the same proportion,” he said.
I was excited. “So, no making costs, no security issues, eh?” I asked.
“No, it’s all taken care of by the fund at a low cost (the expense ratio), since they do it in bulk.” “And what about the quality of gold? Is there any risk there?” As if he were expecting the question, the man started, “ETFs buy only gold bars approved by London Bullion Markets Association with 0.995 purity.”
“See, I can’t afford to buy 1 kg of gold and jewellers won’t sell me smaller quantities. What do I do?” I asked.
“You can go for a gold fund, where each unit has underlying gold of as low as half a gram, which is only around Rs 600 at current prices.” That sounded good.
(The example is hypothetical)
The writer is CEO & CIO, Quantum Asset Management Co Pvt Ltd and can be reached at Devendra@QuantumAmc.com.
