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Weird (Non) Investing Reasons


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My interactions with a cross section of investors has thrown up weird reasons for not investing and equally strange reasons for investing one’s money. Why I term them as weird is because there is no reasonable logic for the same. 

REASONS FOR NOT INVESTING

Lack of time!

Many people have all their savings lying in the bank account earning a meagre 3.5% only because they do not have the time to look at their Financial matters.

Lack of Understanding!

There are others who decide not to invest because they do not understand the various investment products. For them Investments mean Fixed Deposit. Major chunk of the individuals fall under this category.

Too many Investment Options!

Some are too perplexed with the various investments options available that they decide not to go through the Investment process at all. Thanks to inflation, the money keeps diminishing in the Savings bank account.

Why not take the Helping hand of an Advisor

 

Don’t want to pay Financial Advice Fees!

Many investors do a hit and trial, ask friends, search around for information and gather some details. This category makes an effort to invest, which is insufficient. But they are not ready to hire a Financial Advisor. Reason being, we in India are never used to paying fees for Financial Advice and want status quo to remain.

Investments is a specialised field and over a period of time you will realise that the growth in your investments far exceed the fees you pay to your Financial Advisor. 

 

REASONS FOR INVESTING

The Agent was a Friend or a Relative!

I rank this THE MOST WEIRD REASON for investing. Whether the agent is a relative or a friend, Do you earn money for yourself or so that the agent can fill his pockets at your cost? Many people invest without looking at the the suitablility of the investment, just to please the relative/friend agent.

Tax Saving!

While this is the least controversial reason for investing, in India it has become the most important one. Most people invest money only so that they can save taxes. Instead of tax saving being taken into account in the whole investments process, the entire investment process happens to save tax. That way the individual saves tax, but loses out on appropriate returns on his investments. 

You have worked hard to earn your money; it’s time to make your money work hard for you.

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Mutual Funds: Pros and Cons


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Over a period of time Mutual funds have become a very popular investment vehicle in India. The reasons for the popularity of mutual funds among investors are many: 

Professional Management

Qualified Professionals manage the Mutual Funds and attempt to maximise the returns and minimise the risk within the stated objectives of the Mutual Fund Scheme. 

Diversification

This is the biggest advantage of investing in a mutual fund, especially for a small investor. This ensures that the investor is not exposed to the risk of a single sector and is not dependent on the performance of one company.

INNUMERABLE ADVANTAGES

Low Costs

An investor can get exposure to professionally managed Mutual Fund investments for as low as Rs. 500. They can get exposure to big tickets investments(like some Fixed income instruments) through Mutual Funds. Also, SEBI has capped the maximum amount that can be charged as an Expenses to the fund based on the fund size.

Liquidity

Mutual Fund Schemes held by an investor are very liquid. They can be redeemed at the NAV of the Scheme which is declared every day and the redemption proceeds are received by the investor in T+2 days i.e. within two days of the date of redemption. 

Choice of schemes

An investors can make a choice from a large number of Schemes so that the investments match with his objectives and goals. 

Flexibility

Within Schemes, investors are provided with a number of options like Growth Option, Dividend Option, Reinvestment Option, Systematic Investment Plan (SIP), Systematic Transfer Plan (STP), Systematic Withdrawal Plan (SWP), etc.

Mutual Funds have come out with a number of innovative products like Trigger facility, transfer of equity gains to a debt scheme, etc. to satisfy the needs of the investors. 

Transparency

This has increased the confidence of investors in the Mutual Fund Structure. Information is available to investors through fact sheets, offer documents, annual reports, periodic investment statements, etc. on a periodic basis.

Taxation

Dividends received from equity schemes of Mutual Funds (i.e. schemes with equity exposure of more than 65%) are completely tax-free. Equity schemes held for more than one year do not attract any capital gains tax on redemption. 

Well Regulated

SEBI Regulations govern the mutual funds industry and protect the interest of investors. This also ensures transparency in the operating of the Mutual Fund. 

DISADVANTAGES

Though very less compared to the advantages, Mutual Funds suffer from the following disadvantages:

(a) In case the manager does not perform well, the fund may give returns lower than the index.

(b) The investor has to pay a management fees and other expenses even if the fund gives negative returns. Returns are not guaranteed.

(c) Investors have no say in their portfolio as the same is managed by the AMC as per the scheme objectives and customisation for an individual investor is not possible.

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Understanding a Mutual Fund


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A Mutual Fund is a TRUST that pools the savings of a number of investors who share a common financial goal.

The money collected is then invested in capital market instruments such as shares, debentures and other market securities. The investments of the mutual fund are driven by the investment objectives of the scheme.

The income earned through these investments and the capital appreciation realised are shared by its unit holders in proportion to the number of units owned by them after recovery of the management expenses.

Thus a Mutual Fund is the most suitable investment for the common man as it offers an opportunity to invest in a diversified, professionally managed basket of securities at a relatively low cost. 

About MF_1

FLOW OF FUNDS

The following are the parties to a Mutual Fund: 

Unit Holder: is a person who is holding the units in a scheme of a mutual fund. The term is comparable to shareholder in case of a company. Unit holder can be a resident individual, HUF, company, NRI, partnership, society etc. 

The Mutual Fund: As stated, the Mutual Fund is the legal entity in the form of a trust which holds investments of its Unitholders. 

Sponsor: A sponsor is the promoter who sets up the Mutual Fund, appoints trustees and the AMC in accordance with the SEBI Regulations. Generally the sponsor and the AMC are part of the same business house. 

Trustee: A trustee is appointed by the sponsor. The trustee holds the property of the mutual fund for the benefit of the unit holders and is responsible to the investors of the fund. The trustee is vested with the general power of superintendence and direction over the AMC.

About MF_2

INTER RELATIONSHIPS

Asset Management Company(AMC): AMC is the business face of the mutual fund as it manages all the affairs of the fund. Investment professionals employed by the AMC determine which securities to buy and sell in the fund’s portfolio, consistent with the fund’s investment objectives and policies. In addition to managing the fund’s portfolio, the AMC often serves as administrator to the fund with the support of the R&T agent and the Custodian. 

R&T Agent: The Registrar and Transfer Agent (R&T) helps investors with the purchase of units in the Mutual Fund schemes, redemptions and switches, change of address and bank details and resolving related queries and complaints. CAMS and KARVY are the key R&T agents in India.

Custodian: The securities which form a part of the mutual fund’s portfolio are usually held by an authorized custodian. The custodian is like the mutual fund’s demat account.

Distributor: A distributor acts as an intermediary between the mutual fund and the investor. He helps the investor choose the right fund as per the investor’s objectives. Mutual fund units can be distributed by only AMFI registered, certified distributors. 

AMFI: The Association of Mutual Funds in India(AMFI) is a body dedicated to developing the Indian Mutual Fund Industry on professional, healthy and ethical lines and to enhance and maintain standards in all areas with a view to protecting and promoting the interests of mutual funds and their unit holders. 

SEBI: SEBI is the market regulator in India which, apart from other functions,  overseas the functioning of the entire Mutual Fund industry with the objective of protecting the interest of investors.

Most Essential Factor for a Successful Investor


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Scores of articles have been written on this topic, what does it take to be a Successful Investor. A quick search on Google will give you results which include Fundamental Analysis, Technical Analysis, Economic data Analysis, Understanding the business of company, Timing the markets, monitoring Currency movements, and the list goes on and on. Then, what is the Most Essential Factor for a Successful Investor?

DISCIPLINE.

This one word overrides all other factors.

Discipline to stick to one’s investment plan.

Discipline to continue to contribute for one’s goals.

Discipline to book profits and re-allocate based on one’s Asset Allocation.

DISCIPLINE PAYS OFF

Studies have shown that more than 90% of the returns earned by an investor can be explained by Asset Allocation. That means, right Asset Allocation (for example, Debt or Equity) is more important than the selection of the actual instrument (say an HDFC Fund scheme or a Reliance Fund scheme). And it requires DISCIPLINE to maintain the Asset Allocation as time passes and as markets fluctuate.

Investors reaped enormous profits when the markets reached new peaks in January, 2008. This was followed by the famed crash in September, 2008 all across the globe. This led to panic redemptions on part of many many investors. Unexpectedly, the markets recovered quickly to reach the 2008 highs in November, 2010.

Investors who stayed invested were the ones’ who reaped maximum returns on the systematic investments made in the dips. Investors who exited in 2008 out of panic have only themselves to blame for missing out on the rally.

Again, the longer you stay invested in the equity markets, lesser is the probability of getting negative returns. A study of the Sensex returns for the past 30 years have shown that, if you were invested in the index for any period of 14 years or more, there is zero probability of earning negative returns. As one of the Investment gurus rightly said, “Time in the market is more important than timing the market”.

Successful investors from around the world swear by only one thing…DISCIPLINE. A Financial Plan helps you initiate and maintain that Discipline.

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Should you invest in Sectoral Funds?


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First of all, what is a Sectoral Fund?

A Sectoral Fund is a Mutual Fund that restricts its investments in stocks of a particular sector. For example: Reliance Pharma Fund invests only in stocks of Pharma companies. UTI Banking Sector Fund invests only in Banks.

An extension of a Sectoral Fund is a Thematic Fund that invests in stocks based on a  particular theme. For example: Birla Sun life GenNext Fund invests in companies that are expected to benefit from the rising consumption patterns in India, which in turn is getting fueled by high disposable incomes of the young generation (Generation Next).

Sectoral and Thematic Funds are generally referred to as a single category. Some of the Sectoral funds available in India include Banking, Pharma, IT, Technology, Infrastructure, FMCG etc.

The reason Mutual Funds launch such schemes is that they believe a particular sector will outperform the broader index and generate higher returns.

 

Risk/Return Profile of Sectoral Funds

Sectoral Funds fall in the ‘High risk’ ‘High return’ category of funds. If the particular sector does well, then one can expect higher than market returns. The same is true vice versa.

For example: Franklin Infotech Fund invests in stocks of only IT companies. On April 30, 2011 the fund had an exposure of over 50% of the fund portfolio to Infosys Technologies and over 25% to TCS. When the March ’11 Quarter results of Infosys did not meet market expectations, its stock price fell and the value of this fund also fell be over 8% in just two days!

Sectoral Fund: The Pawn or the Queen?

Should you invest in Sectoral Funds?

Sector Funds add a flavour to your portfolio and hold the possibility of increasing the returns of your overall portfolio if they do well. Some of the best performing funds in the last five years have been Sectoral Funds in the Banking and Pharma space.

You should take exposure to Sectoral Funds only if you have the higher risk appetite. Again, you must ensure that investments in Sectoral Funds do not exceed 10% of your total portfolio.

Points to be kept in mind before investing in such funds

Firstly, you need to understand the objective of the Mutual Fund scheme properly. For example: Some Sectoral Funds invests only up to 65% of the portfolio in the stated sector. This can dilute your exposure to a sector.

What is included in the definition of a sector/theme also varies from fund to fund. For example: As on date, DSP T.I.G.E.R Fund and ICICI Infrastructure Fund have significant exposure ICICI bank. The logic being, as infrastructure grows, banks are going to be directly benefited by increased lending. This also needs to be studied.

Secondly, you need to check the exposure of your investment portfolio to a particular sector. For example: Most diversified equity funds already have a good exposure to the banking sector. One must take this into account before taking additional exposure to the banking sector through sectoral funds to avoid over exposure.

Thirdly, you must understand that the fund manager of a sectoral fund is restricted in his investment options and will have to continue to invest in a particular sector even if that sector is not doing well. A diversified fund manager has no such restriction and can easily make a switch.

Lastly, compared to a diversified Equity Fund, a Sectoral Fund is not held in the portfolio for a very long time, say 10-15 years. When a Sector is expected to do well, one buys such a fund and exits the fund once it starts going out of favour. The tenure for such funds generally is 3-5 years. Some amount of timing is required to enter and exit such funds.

For example: The Infrastructure sector in India did very well till the markets crashed in 2008. Even though the markets recovered from the crash, the sector has grossly underperformed the broad index till date.

In conclusion, take an informed decision before investing in a Sectoral/Thematic fund.

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Risk Involved in Investing in Equities


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As mentioned, Risk is the uncertainty involved in the expected returns. Risk associated with Equities are much higher compared to Debt instruments. So are the returns. This follows the universal principle, “Higher the Risk, Higher the Return”.

Market Risk

The biggest risk associated with Equities is Market Risk. Equity instruments are volatile and prone to price fluctuations on a daily basis due to changes in market conditions.

Financial Risk

This is the second biggest risk associated with investment in Equities. Disruption in the internal financial affairs of a company will have a direct impact on the share prices of the company and may cause a loss to the investor. A prime example of such an instance is the Satyam fiasco in the January 2009 or a recent example of management fights in SKS Microfinance.

 Investing Risks…there are a multitude of them.

Liquidity Risk

This refers to the ease with which a security can be sold at or near to its market value.

Securities, which are not quoted on the stock exchanges, are inherently illiquid in nature and carry a larger amount of liquidity risk in comparison to securities that are listed on the exchanges. While securities listed on the stock exchange carry lower liquidity risk, the ability to sell these investments at the market price is limited by the overall trading volume on the stock exchanges.

Settlement Risk

It is a risk that the counter party does not deliver the security purchased against cash paid for it or value in cash for the security sold is not received after the securities are delivered by us.

Such risk can be avoided by entering into transactions in the nature of delivery versus payment (DVP) or settlements via clearing houses where the Stock Exchange acts as the counter party to every transaction.

 Risks associated with investing in foreign securities

The biggest risk associated with investments in foreign securities is fluctuation in foreign exchange rates. If you invest in a US Stock which gives you 20% return over a period of time and the US Dollar depreciates by 10% during this period, your net return in domestic currency will be much lower than 10%.

Other risk involved include restriction on repatriation of capital and earnings under the exchange control regulations and transaction procedures in overseas market.

You will see that a some of the risks listed above also affect Debt Securities. It is very difficult to segregate risks which affect only one type of investment.

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Mutual Funds Investment Options – Dividend or Growth


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Investments Options basically address the question of what should be done with the returns you receive on the investments made. In a normal Fixed Deposit, you receive interest periodically. The interest is either paid to you (known as Simple Interest) or it is reinvested and so that the interest earned in the first year is invested and earns interest in the second year (compound interest). In case of direct investment in equities, if the value of the share increases and a dividend is declared, it is received by you in your bank account and the value of the equity share falls to the extent of dividend received by you. When you invest in any Mutual Fund Scheme you have the following Investments Options: Dividend Option: Under this option, the Mutual Fund Scheme periodically declares a dividend which is paid out to the investor just like how an equity share paid the dividend or how a fixed deposit pays interest. However, the dividend is not guaranteed and is subject to profits made by the Mutual Fund Scheme and availability of distributable surplus. If the units of a Mutual Fund Scheme ‘A’ are valued at INR 45 per unit and the Scheme ‘A’ declares a dividend of 20%, an amount of INR 2 (20% of INR 10) will be paid to the investor and the value of the Scheme ‘A’ units will fall to INR 43. This option suits someone who is dependent on his investments for regular income. Growth Option: As the name suggests, under this option profits earned remain invested and are not withdrawn. The advantage of this option is that your investments continue to grow on a larger base and you enjoy the compounding advantage . In the above example, your Mutual Fund units in Scheme ‘A’ continue to be worth INR 45 and grow year on year. In case you are investing to build a corpus over a long period of time, this is the option you must select. Dividend Reinvestment OptionUnder this option, the amount of dividend declared by the Mutual Fund Scheme is used to buy more units in the scheme. The dividend of INR 2 declared above by Scheme ‘A’ is not returned to the investor, it is used to buy more units in the Scheme ‘A’. The net effect of the Dividend Reinvestment Option on the value of the investments is the same as the growth option. Dividend Reinvestment Option has a small tax advantage for Liquid Schemes. Short-Term Capital gains on Liquid Schemes are charges as per the investors’ slab rates (maximum slab rate: 30% plus surcharge plus education cess). However, the dividend declared by a Liquid Scheme pays a dividend distribution tax of 20.3576%, resulting in the tax advantage.
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Modes of investing in MF – SIP, STP, VIP etc


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Having decided the mutual fund and the scheme one wants to invest in, the investor has to finally decide through what mode he is going to invest the money. He has the following modes available to him: Systematic Investment Plan(SIP): This is the most popular choice for a salaried individual or any person who saves money regularly. Every month on a specified date an amount you choose is invested in a mutual fund scheme of your choice. The forms/instructions need to be submitted only once and every month the amount is deducted from your bank account and invested in the Mutual Fund Scheme. Hassle Free Investments. Systematic Transfer Plan(STP): In this mode of investing, where you initially park your entire INR 1 lakh (a big lumpsum amount) in a less risky category of mutual fund such as a liquid scheme, and then systematically transfer money on a regular basis from the liquid scheme to an equity fund or any other mutual fund scheme of the same fund house. For a business person who earns in lumpsums, STP is the best option. Since markets are volatile in the short run, and its impossible to time the markets to perfection, an investor must opt for STP.  This helps even out the volatilities just like the SIP option. Lumpsum (one time) – When you have a big sum of money lying in your bank account and you wish to invest the entire money in one go, then you can consider investing via lumpsum investments. This is more risky, as the entire amount is exposed to risk immediately.
Value Averaging Investment Plan(VIP)
VIP differs in the fact that while in SIP the monthly investment is a fixed amount, in VIP the monthly investment varies. The beauty of VIP lies in how the monthly amount to be invested is decided. VIP works on the concept that one must invest more when the markets are low and invest less when the markets are high. Based on the returns being generated by the market, VIP decides to invest more when the market fall and vice versa.
A target investment amount that has to be achieved monthly, needs to be set. Based on the target, the value of subsequent investments will be derived from the difference between the target and the actual value of the investment. Systematic Withdrawal Plan(SWP) is the complete opposite of SIP. It helps you withdraw equal sums of money on a periodic basis. Once you have accumulated a corpus through investments over a period of time, the SWP route can be used to withdraw the money on a monthly/weekly basis to cater to your needs. Value Averaging Transfer (VTP) – works on a similar while flexibly transferring money from one scheme to another based on the set target. VTP is similar to VIP in terms of the concept of investment. The difference here is that instead of a bank account, the money is transferred from a liquid fund to the selected equity fund VTP is not suitable for novice investors. They should consider investing through STP in the early stage of investing. Dividend Transfer Plan(DTP): An innovative option for risk-averse investors. One has two choices under this. If you have invested in an Equity scheme, you can decide to transfer Dividend declared by the Equity Schemes to a Debt Fund. This ensures that your profits are protected and transferred to a safer avenue. Conversely, if you have invested your money in a debt scheme, you can transfer Dividends declared by the Debt Fund to an Equity Scheme. This way your capital is protected and your returns are invested in equities in a bid to earn higher returns. As you can see, the underlying for all the above option is to help an investor become a disciplined investor and to overcome the problem of timing the market.
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Open-Ended and Close-Ended Funds


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The Indian market has begun to realise the potential of mutual funds as the most advantageous avenue for exposure to equities. Mutual funds are going to be your money partner for the rest of your life. It is worthwhile to spend a little time for understanding some basics related to mutual funds. We have already touched upon the types of Mutual Funds on the basis of the investment objectives (Equity, Debt, Gold, etc.). Another distinction in Mutual funds is based on the length of time for which the fund is collecting money. The two categories are Open-ended and Closed-ended funds. An Open-ended fund has a perpetual lifespan-Ended and you can invest in the fund or redeem your investments at any time. As inflows are unlimited and, typically, unrestricted, there is no limit to what the corpus can grow to. At present most AMCs prefer to launch has funded as it helps the AMC garner money A close-ended fund restricts the inflows to a specified period. They are open for subscription for a few days from the date of their launch. The Fund stops accepting funds from the public, once the subscription period ends. However, to ensure liquidity, the fund houses list their closed-ended schemes on a stock exchange. The number of outstanding units of a closed-ended fund does not change as a result of trading on the stock exchange. Apart from listing on an exchange, these funds sometimes offer to buy back the units, thus offering another avenue for liquidity. SEBI regulations ensure that closed-ended funds provide at least one of the two avenues to investors for entering or exiting.
                                                                                                                Choose the Fund to suit your purpose
Close-ended funds, by their feature, come with a fixed tenor ranging from 3 months to over 3 years. Most Close-ended funds are Debt Funds. Fixed Maturity plans launched with a fixed tenor, is the best example of a Close-ended Fund. It is not uncommon for Fund Houses to launch Close-ended Equity Funds. Such funds help the Fund Manager invest as per the market cycle and prevent the investors from cashing out in case of adverse market conditions. Once the fixed period for the close-ended fund gets over, the maturity proceeds are either repaid to the investors (typically, in the case of debt funds) or the close-ended fund is converted into an open-ended fund (typically, in the case of an equity fund). Once converted to an open-ended fund, the fund is open to subscriptions and redemptions like any open-ended fund. Close-ended schemes are traded on the stock exchange in comparison to the open-ended schemes. Also, close-ended schemes have different pricing as compared to the price you buy because they are traded on the exchanges. Different periods of time in the last 20 years have seen open ended and close ended funds change in popularity with the AMCs. In the early years of the mutual fund industry, fund managers were not sure if investors would stay invested in the fund. Due to this uncertainty on account of investor behaviour, most schemes launched in 1990s were closed ended schemes. With the growth and maturity in the market, fund managers gradually moved towards the open ended schemes. Funds switched to launching closed ended funds in 2006 and 2007 due to a cost advantage as the closed ended funds allowed to charge initial marketing fees from the investors. With changes in SEBI regulations, that advantage no more exists and currently AMCs launch open ended or closed ended funds keeping in mind the purpose of the fund and investor requirements. What, then, should be kept in mind by the investor while choosing between the two kinds of funds? Close-Ended Debt funds begin with a fixed tenure. This enables the Fund Manager to invest in securities in line with the term of the Fund. This reduces the Interest rate risk faced by the investor as the investments in the Fund are held till maturity. In case of Close-ended Equity fund, the manager knows the size of the corpus he has to manage. Another advantage is that there are no redemptions from the fund during its tenure. The Fund Manager need not hold excess cash in anticipation of redemptions. However, there is no proof to show that Close-ended funds have performed better than open-ended funds.
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Gold Exchange Traded Funds (Gold ETFs)


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In turbulent times, gold has shown up as an effective hedge against equities in a portfolio. Though there are many ways in which one can exposure to gold, investing in Gold ETFs stand out because of its many advantages and convenience.

Gold ETF is an Exchange Traded Fund that aims to track the price of gold. Just like how equity shares of a company are bought and sold on the Stock Exchange, Gold ETFs can be bought and sold on the Stock Exchange at the prevailing market price of gold.

How to Purchase: To be able to purchase a Gold ETF, one needs to have a Demat account and a trading account with any broker. Gold ETF’s are traded in units wherein one unit represents one gram of gold.

This means when you buy one unit of a Gold ETF, you are buying one gram of gold and that one unit(gram) of gold will be credited to your Demat account. In case of some Gold ETFs, one unit can represent half a gram of gold. Just like equity shares, you will have to incur brokerage costs when you buy or sell Gold ETF units.

Taxation: If the units of Gold ETF are held for less than one year, then you will have to pay short-term capital gains on such sale. If the Gold ETFs are held for more than one year you can pay either at a 10% tax rate on the gains without indexation or a tax rate of 20% with indexation, whichever is lower.

GOLD ETFs in India: India has the following Gold ETFs as on date:

  1. Birla Sun Life Gold ETF
  2. Goldman Sachs Gold ETF
  3. Religare Invesco Gold ETF
  4. Quantum Gold Fund
  5. SBI Gold ETF
  6. IDBI Gold ETF
  7. R*Shares Gold ETF
  8. Axis Gold ETF
  9. Kotak Gold ETF
  10. ICICI Prudential Gold ETF
  11. UTI Gold ETF
  12. HDFC Gold ETF
  13. Can Gold ETF

 

Gold ETFs are being traded in India since March 2007. Benchmark Asset Management Company Private Ltd. was the first to put in the proposal for gold ETF with the Securities and Exchange Board of India (SEBI). However, that is no longer offered on the exchange.

 

Advantages of Gold ETFs:

(a) An investor can purchase gold in small amounts as one unit of the ETF represents one gram. These small amounts can be accumulated over a period of time.

(b) As the gold purchased is credited to your the account, there are no hassles with respect to storage of gold purchased.

(c) Compared to the purchase of physical gold, there are no worries with respect to the quality of gold purchased.

(d) Gold can be bought and sold at the prevailing market prices with no deductions with respect to making or handling charges.

(e) Compared to physical gold which has to be held for more than three years, Gold ETFs qualify for Long Term Capital gains if held for more than one year.

 

Gold ETFs have become the mode of investment in recent times and have been growing at a rate of over 50%.

 



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