There are Gold ETFs (Exchange Traded Funds) listed on NSE. By prospectus, these are backed by Gold bullion, which are kept safely in vaults. Apart from this, the banks sell Gold bars to retail customers. Given the same purity of gold, I would expect both the instruments to be priced at a similar level. However, there’s a marked difference in prices. For example, Benchmark Gold BeES ETF, in which each unit is supposed to reflect the price of 1 gm of gold, closed trade at 1495 per unit. Whereas Kotak Bank is selling Gold bars at about Rs 1810 per gram. Any thoughts on why there’s this discrepancy?
The difference could be due to one or more of the following reasons: 1. Banks charge a premium of 6-10 per cent on the gold that they sell; 2. Gold ETFs have expense ratios of around 1 per cent; 3. Price of Gold ETF depends on the number of buyers/sellers available at any point and may deviate a bit from its actual NAV (net asset value); 4. Price of Gold ETF is benchmarked to gold futures as traded on international exchanges — which may be different from the “current” market price of “physical” gold in India; 5. Gold ETFs hold a portion of their assets (<10 percent) in cash.
Although the quoted price of Gold ETF may vary from the market price of gold at any point, the return from investing in Gold ETF would be similar to the return from holding real gold. This is because the price of Gold ETF tracks the price of real gold over time. Please note - I am not referring to Gold Mutual funds that invest in stocks of Gold mining companies.
Gold ETF offers a very convenient and safe way to invest in gold for the long term. They are also highly liquid and you could choose to sell your entire holding any day, on the stock exchange, with the click of a button — all you need is a demat and online trading account. So, you don’t have the usual headaches associated with buying, holding or selling real gold. Benchmark Asset Management Company’s Gold BeEs is a well-established Gold ETF that you can consider. What you need to keep in mind though is that currently gold price is at record highs due to general global economic uncertainty. Once the global economy recovers and investors regain confidence, gold prices may fall.
Is the stock market a zero sum game? Does it mean that for one to make a profit another must make a loss?
Investing in stocks is neither a game nor a zero sum one. Over the long term, increase in value of a stock reflects the growth in value of a company. Let’s say for example, five years back, you purchased shares in company A for Rs. 20 per share when the company’s earnings (profit) were equal to Rs. 2 per share i.e. you paid 10 times earnings. Today, let’s say the same company is generating earnings of Rs. 5 per share, in which case your shares would most likely be worth at least Rs. 50 per share. If you choose to sell today, your profit would be Rs. 30 per share i.e. 50 minus 30. Now, if I buy these shares from you and if in the next five years the share price increases to Rs. 100 per share, I too can make a profit. Although for every buyer in the stock market there needs to be a seller, both can technically make a profit, albeit during different timeframes.
I have some extra cash available for investment. I also have a floating rate home loan running. I am in two minds whether to use the extra cash to pre-pay my existing home loan or make fresh investment in stocks through Mutual funds. What do you think?
If you had asked the same question a few months back, I would have said go ahead with your plan to invest in a carefully chosen equity mutual fund. This is because the stock market and most stocks were significantly undervalued and any above average mutual fund would have given you at least 20+ per cent return per annum over the long term, from then prevailing price levels. Meaning, had you invested your extra cash few months back, you would have been relatively sure of getting at least twice in terms of return on your investment compared to the interest rate that you were paying for your home loan (approx 10 per cent). So, it would have been okay to keep the loan running and use any extra cash to make careful equity investments.
But today, the stock market scene has changed dramatically. The Nifty Index is trading at a P/E (price to earnings) of greater than 20. Most stocks are fairly valued (with some even over valued) except a rare few. Investing in the equity markets, especially through a mutual fund, at the current high price levels, may not offer high returns. That doesn’t mean that you must sell all your investments in stocks or mutual funds; you just have to be extremely choosy in making fresh investments in equities.
My advice to you is that you may be better off pre-paying your home loan at this stage. This way you can protect yourself from incurring higher EMI charges in your floating rate loan when the interest rates start going up a few months down the lane (something that is expected). You can use the same logic at any point in the future to reevaluate your options — is the expected return from your fresh investment ‘significantly’ higher than the interest rates that you are servicing on your home loan or on any other loan that you have going? If it’s not, you may as well repay the loan.
The writer is a finance specialist and consultant. You can reach him at : firstname.lastname@example.org or www.shyamscolumn.com