Savvy enough to enjoy ETF purchasing?

The Indian economy has seen a rapid flux in recent times and the role of SMEs cannot be negated in this situation. As an SME, you have to be ahead of the rest with some wise decisions in an investment-centric environment. If you are looking for a safe bet, then focusing on gold exchange-traded funds (ETFs), a traditional choice of enterprising individuals and households, could be a solution for you.  

What it does

ETFs work like shares except for the fact that they are backed by physical holdings of a commodity. Similarly, gold ETFs enable buyers to own gold without any physical possession. ETF purchasing assures the SMEs who can use them to hedge gold commodity risk. It can also work as industry ETF and help the SME in gaining exposure to the gold mining industry. Gold ETFs can also be useful as a hedge for regional risk or be supportive in gaining foreign exposure.

Gold ETF

From where you can buy ETF

India has over 10 ETFs which are backed by various mutual funds which are supported by financial institutions and banks amongst others. Some of the popular ETFs included Benchmark Gold ETF Gold BeEs, HDFC Gold Exchange Traded Fund, ICICI Prudential Gold Exchange Traded Fund, KOTAK GOLD ETF, Religare Gold Exchange Traded Fund, Axis Gold ETF, etc.  All ETFs charge an expense ratio and management charge for their services. These could vary from 1 per cent to 3 per cent depending upon the asset management company. You can read the offer document of each of the companies and make a decision for yourself. The trend in India is upstream against the global situation where gold has witnessed an all-time drop in their demand for gold ETFs. 

The ETF advantage

ETFs are expected to witness a surge in the coming times. Thus, as an SME, you can easily earmark part of your profits, without worrying about the duration of the investment – long or short. You can easily hedge a part of the portfolio and gold ETFs prove to be a viable path in the presence of pressing inflation. Gold, especially guarantees financial insurance for many investors. Even the first month of the New Year has reflected an explosive growth for gold funds. You can make purchases in small denominations with the smallest ETF unit being one gram of gold. Also, since there is no physical delivery of gold, hence one need not worry about quality of the gold. You are also not bothered about storing the gold as there is no physical entity. The ETFs can easily be resold or traded on the exchange. 

ETFs – the other side

On the other hand, as an investor, you may be required to submit long term or short term capital gains tax on gold ETFs when you make a profit. The asset management company is in charge of your gold ETFs and hence a mistake on their decision to invest could lead to losses for you. Also, there is a possibility of tracking error between the gold price and gold ETF which may lead to deductions. Another threat is the liquidity which may result out of lack of volumes in the gold ETF trade. 

The numbers as they stand today

India’s investment in ETFs has risen to whopping 30tonnes in 2011 as compared to 15tonnes mark in 2010. SMEs have invested in large numbers with 50 per cent of total ETF purchases reported by companies. As per the experts’ opinions, gold, despite its vagaries and fluctuating volatility is still presumed to be a viable option for companies that want to boost their investment portfolio. It is also considered as a safe bet by many Indians and good protection against inflation which has been dictating the Indian economy for quite some time.