Monday, March 4, 2013

What is ETF (Exchange  Traded Fund  )  ???

it is exactly like a mutual fund.Except that

1) It is traded on the exchange, like shares. hence the name.
2) Its value fluctuates all during the day like shares (though minimally), while
MFs value is declared at around 2PM everyday only once.
3) It is free from any entry load (now banned by SEBI) and exit loads applicable on MFs.
4) It is subject to brokerage charges like shares.
5) When you sell ETFs, your account is
credited with the money at end of day unlike MFs where it takes 3-5 days to credit your account.
6) You need a
demat account to buy and sell ETFs. With MFs you can buy and sell them using your online bank account or through some agent.

What an ETF does is that it creates a fund for some entity. Say you want to invest in Gold in DeMat form  !!!!!

Gold costs around 32,000 / 10gms. Now how about an investor like me who only has five thousand bucks, but still wants a share of the pie (i,e. benefit from the rise in price of gold)?

THIS IS possible thru ETF !!


  • Just like a mutual fund, ETFs have a net asset value (NAV), the price of each unit at the end of the day. 
  • But as ETFs trade in real time, funds provide an indicative NAV, or iNAV, which is the real-time NAV of an ETF. iNAV may be different from the market price.

Benefits of investing in ETFs

·         Convenient to trade as it can be bought/sold on the stock exchange at any time of the day when the market is open (index funds can be bought only at NAV based on closing prices)
·         One can short sell an ETF or buy on margin or even purchase one unit, which is not possible with index-funds/conventional MFs
·         ETFs are passively managed, have low distribution costs and minimal administrative charges. Hence most ETFs have lower expense ratios than conventional MFs
·         Not dependent on the fund manager
·         Like an index fund, they are very transparent

Disadvantages of investing in ETFs

·         SIP (Systematic Investment Plan) in ETF is not convenient as you have to place a fresh order every month
·         Also SIP may prove expensive as compared to a no-load, low-expense index funds as you have to pay brokerage every time you buy & sell
·         Because ETFs are conveniently tradable, people tend to trade more in ETFs as compared to conventional funds. This unnecessarily pushes up the costs.
·         You can't automatically re-invest your dividends. Secondly, you may have to pay brokerage to reinvest dividends in ETF, whereas dividend reinvestment in MFs is automatic and with no entry-load
·         Comparatively lower liquidity as the market has still not caught up on the concept


  • Gold ETFs are exchange traded funds that are meant to track closely the price of physical gold. 
  • So gold ETF lets you own gold in your dmat account. 
  • Each unit of the ETF lets the investor own 1gm of gold without physically owning it.
  • Thus investing in a gold ETF provides the benefit of liquidity and marketability which are a limitation of owning physical gold. 
  • Gold ETF is liquid because you can trade in it at any time during market hours. 
  • Gold ETF is marketable because you can trade any amount in it just like a normal stock including short selling and buying on margin. 
  • Owning gold ETF also is cheaper than owning physical gold because it has no cost of carry (the cost of storing physical gold).

thats why govt want to push these kinds of funds so that people dont need to buy physical gold for investment and we dont have to.spent our dollar reserve for importing gold thus current account deficit will be reduced which is record high at 4,2%

Top Performing Gold ETF in India 

What are Gold Bonds then ?

  • Gold bonds or gold-convertible bonds are debt instruments that are typically issued by gold mining firms (abroad). 
  • These bonds are secured by a stored quota of gold and their yield depends heavily upon fluctuations in global gold prices. - 
Gold bonds in India ????

Government may issue gold bonds.....this wl significantly help to reduce gold imports in INDIA .!

Then the difference between Gold ETF and Gold bonds?

A gold ETF tracks the real time price of gold in the market, it is equal to holding physical gold but the difference is you don’t take the delivery of the gold in your hands. It is electronically held, which gives the benefit of easy disposal, easy liquidity and real time prices for your gold. You don’t have to pay for making charges. Nor do you have to pay wealth tax on the gold ETF. You will fall under the debt taxation category. A gold ETF is one of the smartest way of holding gold as there is no worry regarding  safe keeping of gold and the transactions can be done for huge amounts, even a leveraged position can be taken.

A gold fund tries to mimic the price of gold by buying stocks of gold mining companies. The logic is when the price of gold goes up the profits of gold mining companies will also appreciate. Which, in turn will lead to the rise in stock prices and increase in your Mutual Fund NAV. Holding a gold fund is like holding a High beta gold investment. However, investors should note that this fund carries above-average risk. While it may deliver higher returns than Gold ETFs during a gold price rally; it is also prone to correcting much more sharply, if prices fall. The theory holds good as long as the markets are in stable state, but during times like in 2008 & 2009 the stock prices in general had dipped, however good the company was the stock prices were down. Gold Funds underperformed Gold ETF's


Recently RBI issued a notification that allows mutual funds and ETFs to invest the physical gold they hold on behalf of their investors into Gold Deposit Scheme with banks

Reserve Bank of India (RBI) has relaxed the maturity period of gold deposit schemes from 6 months to 7 years. Earlier it was from 3 years to 7 years. With this move people will invest more in gold schemes, as per RBI. 


Gold exchange-traded funds (ETFs) are more tax efficient than physical gold

The income-tax factor
For taxation purposes, gold investment is categorised into two-gold ETFs and physical gold, including coins, bars, jewellery and even e-gold.
Gold ETFs are treated like debt funds in terms of tax treatment. The capital , the Securities and Exchange Board of India, broadly categorises all funds into two—equity funds and all other funds. Since ETFs are not equity funds, they fall into the second category. Accordingly, you need to pay short-term capital gains (STCG) tax as per your tax slab if you sell ETF units within a year of investing. This means you may have to pay as much as 30.9% if you are in the highest tax bracket. But if you sell the units after a year of investment, the proceeds will attract long-term capital gains (LTCG) tax at 10.3% without indexation or 20.6% with indexation.
In case of physical gold, the disadvantage is that the period for which STCG tax is applicable is three years compared with just a year in gold ETFs. LTCG tax is applicable after three years and you don’t have the option of paying tax without indexation.

The wealth tax factor
There is no wealth tax in gold ETFs, but the same is applicable on physical gold. If the value of your net gold exceeds Rs 30 lakh, you need to pay 1% of the excess value as wealth tax. The excess value does not include the amount of an ongoing loan you may have taken to procure gold.
For instance, if the value of the net gold you hold is Rs 50 lakh, but you have a loan of Rs 10 lakh to buy the metal, the value of your net gold would be Rs 40 lakh (Rs 50 lakh minus Rs 10 lakh). Accordingly, you would need to pay 1% wealth tax on Rs 10 lakh (Rs 40 lakh minus Rs 30 lakh), which comes to Rs 10,000. You need to pay wealth tax every year till the time you do not sell the same.



  • Systematic Investment Plan---Systematic Investment Plan (SIP) is a vehicle offered by mutual funds to help investors save regularly.
  • It is just like a recurring deposit with the post office or bank where you put in a small amount every month. The difference here is that the amount is invested in a mutual fund.
  • The minimum amount to be invested can be as small as Rs. 100 (100 Indian Rupees) and the frequency of investment is usually monthly or quarterly.

What are commodities?
  • A commodity is a physical good which has a demand for itself and the market treats all sources of supply equally without any differentiation. 
  • The price for a commodity is determined purely by global demand and supply. 
  • Commodities have emerged as a popular asset class in the recent times because they provide a good hedge against inflation because in an inflationary environment, the nominal price of commodities starts rising even though their real value is unaffected.
  •  Since the price of the commodity is usually denominated in the domestic currency, its real value in the home country is unaffected by inflation.


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