Gold ETFS Vs BSE Sensex During Jan 2008 Market Fall

About Gold ETFs

• What are gold ETFs?
• Taxation implications of gold ETFs
• Some observations on gold ETFs
• Performance of gold ETFs in January stock market fall
• iTrust observations
  • 0ld ETFs as a secure asset class
  • During negative sentiments in the market, gold is a secure asset class.

Definition

• Investors can buy and sell the units of Gold ETF (Exchange Traded Funds) directly on the stock exchange through a SEBI registered broker.
• Gold ETFs give an opportunity to investor to invest in standard gold bullion (0.995 purity) neither taking the physical delivery of gold nor compromising with its quality.

Difference between Gold ETFs and physical gold

Parameter	Gold ETFs	Physical Gold
Holding	Dematerialized Form	Coin, bar etc.
Transparency	Very High	Very Low
Pricing	Will be traded at NSE/BSE, so, transparent	Not Transparent
Sale	Can be done on the exchange itself	Based on set of conditions
Wealth Tax	No	Yes
Short Term Capital Gain Tax	If sold before 1 year	If sold before 3 years
Impurity Risk	Nil	High

Benefits of Gold ETFs over Physical Gold

• No risk of storing the investment and its security
• Higher liquidity and easy to buy or sell

Taxation Implications of Gold ETFs

ETFs are taxed on the same lines as of debt mutual funds. Following is the taxation slab:

Category	Short Term Capital Gain Tax	Long Term Capital Gain Tax	Dividend Distribution Tax	Security Transaction Tax
Individual	As per income tax slabs	10% or 20% with indexation	14.16%	0.125% at redemption
Corporate	30%	10% or 20% with indexation	22.66%	0.125% at redemption
NRI	As per income tax slabs	10% or 20% with indexation	14.16%	0.125% at redemption

Observations about Gold ETFs - 1

Based on the above chart, we can make the following observations:

• Gold ETFs in India have performed exceptionally well when the market has fallen as shown by the green line (an over performance of 15.52% in 3 months).
• However, Gold ETFs in India tend to under perform the Sensex ( 9.18% in 1 month) during the bull run in the stock market. (In India, gold ETFs are recently launched. Therefore, up to 6 months performance is compared.)

Observations about Gold ETFs - 2

Over the period of 6 months (2nd August 2007 - 5th February 2008)

Asset Class	2nd August 2007	5th February 2008	Absolute Gain	% Gain
Equity (Sensex)	Rs 100,000	Rs 124,540	Rs 24,540	24.54%
Gold (Gold ETFs)	Rs 100,000	Rs 129,920	Rs 29,920	29.92%
Absolute Out performance (Gold ETFs over Sensex)			Rs 5,380	5.38%

Therefore, following are the important points:

• Gold proves out to be a secure asset class at the time of market downfall
• In last 6 months, though the market moved northwards most of the time, a steep fall in January pulled down the aggregate returns with a higher percentage.
• An investor would have gained Rs 5380 more if invested in Gold ETFs and not in Sensex. This is due to exceptionally good performance of Gold ETFs in India in Jan 08 even though this asset class was under performing during Oct-Dec 07

Facts about Gold ETFs During the Jan 08 market fall

• During the market fall last month, the indices (Sensex and Nifty) have seen a steep fall of approx. (-9.78%) and (-12.60%). Following this fall, equity diversified funds have also seen a downtrend of around (-15.67%) on an average.
• Contrary to this, Gold ETFs have delivered positive returns and also over performed the equity indices .
• Gold ETFs have returned approx. 3.77% in the month of January when the markets have shown negative sentiments.

iTrust Observations

• Gold ETF is an advisable asset class that can be a part of investor's portfolio to add to the diversification. These are low cost instruments and highly transparent.
• Specially with the negative sentiments in today's market, gold is a secure asset class.
• This asset class can bring stability and security in a well diversified portfolio.

Disclaimer

The information contained herein, together with all estimates and computations, if any, can change due to legislative, regulatory or market forces. This document does not purport to be a solicitation of any advice pertaining to any tax or any other matter. Recipients are advised to consult their tax advisor / insurance agent / investment advisor / bank, and study / evaluate the facts of the matter and other information available before using the information provided in this response.

Amith said : 06/03/2011	Consider an investor who invests via Gold ETF and does not use the demat account for any other purpose. In this scenario will investing in Gold ETF be efficient (considering the transaction charges and monthly charges for maitaining demat account) Need to assess the gold etf in this scenario
Dr.Goli said : 15/01/2011	ETF information is good. You are requested to update the contents upto Jan. 2011
Prakash said : 11/01/2011	Your article is very informative
Ritesh said : 19/08/2010	your article is excellent...
Angad said : 13/08/2010	Article was really good and resourceful.Good for freshers.
Candida said : 18/06/2010	informative
ramechu said : 12/02/2010	This is a good article. Thanks.