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Gold, the king of metals, has a stranglehold over our collective psyche which is perhaps unparalleled. It is rare to come across a housewife in India who does not know the current price of gold. Imagine how convenient it would be if you could buy gold (preferably everyday) from home, rather than having to visit a jeweller or a bank!

This write-up presents an efficient way to invest in gold through the stock market. You can invest in gold by buying units of gold exchange traded funds (ETFs).

Bereft of technicalities, gold ETFs are mutual fund schemes that invest in gold. Mutual funds are regulated by the Securities and Exchange Board of India (Sebi) and are not to be confused with the unregulated and unregistered chit funds.

As a retail investor you can peacefully invest in gold through gold ETFs with the full assurance that they are governed by a proven legal framework.

Gold ETFs buy standard gold (99.5% purity) and place it with custodian banks for safekeeping. Against this gold, units are issued, which are equivalent in value to about 1 gram of gold. These units are traded in the stock exchange like any other share.

The value of a unit of a gold ETF [net asset value (NAV)] is the current price of gold, less the scheme?s expenses (explained later on). This is computed daily and published in the web site of the ETF. Accordingly, when the price of gold rises, so does the value of units and vice-versa.
Units of gold ETFs are listed and traded on the National Stock Exchange and you have to buy (or sell) it through a stock broker. However, you do not have to visit the stock broker?s office for this. You can transact from your home through the internet. A computer, broadband connectivity and basic proficiency in using them are all that are necessary.

To begin with, you need to open a ?3-in-1? account. Many of the new private sector banks like ICICI Bank, HDFC Bank, Kotak Mahindra, Axis Bank etc offer ?3-in-1? accounts that can be operated through the internet. Public sector banks do not provide this facility.

The trading mechanism:
Firstly, to buy units of gold ETFs, you have to deposit the requisite amount in your savings bank account. The price of standard gold is now about Rs 12,000 per 10 grams. Say, if you want to buy one unit (i.e. about 1 gram of gold), you need to deposit about Rs 1,250 in your savings bank account.
Secondly, you have to log into your trading account and place your buy order. The trading account will also show the amount available in the savings bank account. For first time users, attending a demonstration of web trading conducted by the service provider is highly recommended.
While placing your order to buy units, you compare the 1) current price of gold (http:www.bombaybullion.com), 2) the value (NAV) of units and 3) the current price of the units in the National Stock Exchange (NSE).

The order book of NSE displays the price and quantity at which people are willing to buy sell units. It can be seen in your trading account as well as the NSE web site. Anybody in India can place orders through their broker and the best five orders, in terms of price and time, are displayed in the order book. When your buy order matches with some other sell order, you would be a proud owner of units of a gold ETF! The next day, your savings bank account will be debited the value of your purchase (+ the brokerage @ 0.75% + service tax @ 12.36%). On the second day, units will be electronically credited to your demat account.

To sell units of a gold ETF, you will do exactly the reverse. You will be able to sell units at approximately the price of gold on that day. Units will be debited from your demat account and the sale value will be credited to your savings bank account.

How to select the ETF:
ETFs recover a portion of their annual expenses from unit holders. The lower the expense charged, the better it is for you - remember, the value of units (NAV) is the current price of gold, less the scheme?s annual expenses. The estimate of expense that will be charged is given in the offer document of the scheme. The offer document gives the contractual the terms and conditions binding the ETF and is available in the web sites of the ETF and Sebi. Therefore, read it before investing (after all, it is your money!).

Liquidity of units, as can be seen from the number of units traded daily, the daily traded value and the size of the ETF scheme, could be another criterion. If you seek dividend income, you can choose the scheme offering a dividend option.

Advantages of Gold ETFs:
You can accumulate gold over a long period by buying say even one unit of a gold ETF (about 1 or ½ gram of gold) every month. At the end of say 10-15 years, you will have sizeable investment in units, which you can readily encash for future needs such as your daughter?s marriage!
You will not incur bank locker vault charges for buying holding units of gold ETFs. However, you will incur charges for your demat account. Unlike physical gold, there is no tension in storage or for safe keeping of units. On the other hand, you can never be 100% sure about the purity of gold, bought from your neighbourhood jeweller. Moreover, there is no loss by way of ?making charges? while selling units.

Income from units of gold ETFs is exempt from tax. Wealth tax (applicable for physical gold) and gift tax for values below Rs 50,000 are not applicable to units. However, depending on your holding period of units, capital gains tax is applicable.

Conclusion:
Despite any problems that you may experience initially due to lack of familiarity, over a period you will gain expertise and enjoy the benefits. Later on you may even pass me investment tips! Here is wishing you many ?golden? investment opportunities!

More posts on Gold here and here

The Scott Adams unified theory says that invest 70% of your money in a stock index fund and 30% in a bond fund through any discount broker and never touch it until retirement.

Let’s check out some important data on expenses and return for the ETFs available in India

Thanks to http://www.benchmarkfunds.com

I need to go through a financial literacy programme and I am making that effort. So do you, dude.

I’ve hated finance. Maybe because I was not able to understand the jargons and the maths. But I guess ignoring personal finance worsens the situation. And the only way to get maximum out of your personal finance is to look it into its eye and grapple with it. You will come out stronger.

If you think it’s too early for you to bother, let me tell you that the first principle of investing is to start early and see the magic of compounding. College grads, fresh MBAs and guys under 25, the smart thing to do is to start now.

Do you think that you have mastered the basics but are not able to use it to your advantage, it’s time to put your thinking cap on and review your strategies. Learn from your failures. Often we tend to get stricken by some deadly internal enemies which Kartik Jhaveri details here.

Some of you guys would be rich enough not to be bothered about these mundane things. But have you ever given a thought that you are in a position to contribute to the nation’s economy by being more efficient about your finances. Wealth has the unique ability to create more wealth. Are you using that power?

Before I move on, let me articulate the background to this financial literacy programme that I am so smitten about. The following facts and questions keep on humming in my mind:

1. Equities give the best returns and you are putting your money in a professionally managed corporate organisation. Compare this with your insurance products which give much lesser returns and your money is invested in the Government which is inefficient with your money, to say the least.
2. However the total AUM under Mutual Funds is about Rs 3.5 lakh crores while LIC alone manages funds worth more than Rs 6 lakh crore. Yes it’s true that LIC has been there for over 50 years and has a huge distribution reach. But it has hardly tapped the huge insurance potential that India has.
3. Financial experts scoff at ULIP saying that it’s very expensive compared to Mutual Funds. But LIC collected more than Rs 25000 crore in 2006-07 and it’s total fund under ULIP is approx 40000 crore which is more than UTI’s AUM of approx 39000 crore (since existence)

All this and more points to widespread financial illiteracy at all levels. Be it college grads, software geeks, MBAs, Engineers, even CFA/Economists( they are experts at business finance or government finance) and even Financial advisors (they rarely have a holistic view), everyone needs to be literate about his personal finances.

And there are over 700 mutual funds, 5000 stocks, 300 insurance policies and hundreds of other financial products to choose from!!

Interested! And the literacy programme that I have in mind will have the following details:

• Financial planning basics.
• Financial markets.
• Financial products like Mutual Funds, Stocks.
• Research reports, Financial analysis, technical analysis.
• Insurance : Basics, Company review, product review.
• ETF : Basics, Company review, product review.
• Bonds : Basics, Company review, product review.
• Tax Planning : Basics, product review.
• Retirement Planning : Basics, product review.
• Children’s education. : Basics, Company review, product review.
• Calculators :Budgeting, Networth, Loan, Asset allocator, Risk analyser,etc.

Any suggestions. And if you are interested why don’t you subscribe to my RSS feed or by email. And tell your friends too. I’ll cover them one at a time. [ I need to learn them and then only I can share it with you ]

Btw, if your eyebrows are tensed up and you are thinking why I am making so much effort working on this financial literacy programme, I’ll tell you my secret. It’s for the website I dream of every day and night!! The site launches in August’07.

This post links to a treasure trove of information on personal finance. Actually, April was National Financial Literacy Month in the US and JDR (GetRichSlowly) has the ultimate collection of posts covering everything on Personal Finance.

Other than the 20 posts linking to the literacy drive, he also links to his popular articles and the websites which provide such information. Maybe it’s all dry information, but you can do well to bookmark that post and keep coming back to it. It’s dry, but important for you. Why? Look at the following questions and then decide.

How much do you know about money? Have you learned about the power of compounding? Do you know how the stock market works? What is a bond? Can you tell the difference between an Income Statement, a Balance Sheet, and a Cash Flow Statement? Do you even know why you would want to?

Do you know how to keep a budget? Do you understand how your taxes are used and why we pay them? Do you know what it takes to purchase a house? How much insurance do you need?

Head on to this treasure trove. Even though some posts are US specific, the concepts are useful and important to learn.

Gaurav’s post on the 30 things he wanted to do before he’s 30 was a brave one. I wondered at his bravery and wished him all the best only to land up in trouble myself He wants a way to build a Networth of 1 Crore before he’s 30 and now wants me to find it.
Gaurav’s target of becoming a crorepati is brave but also bordering on being foolhardy, I think. To top it, he wants to start with a seed capital of only Rs 2 lacs and a monthly infusion of Rs 20000! This way he will need to grow his money at an outstanding rate of 200% annually!!

Impossible. Or could be there some way? Legal, ofcourse.

Very recently I read a book, The Big Idea, which ends with the following Goethe’s couplet: Whatever you can do, or dream you can, begin it. Boldness has genius, power and magic in it.

Here in this blog I have been talking about Mutual Funds, Real estate, Bonds, ULIPs and ETFs. All of them do not pass muster when it comes to giving a return Gaurav wants. What about stocks? Yes, there are stocks that have given that kind of return in the past. But how to identify those stocks who would do the same in the next 30 months? Nobody knows those stocks. So is there still a way?

Now Gaurav says that he has avery high risk appetite. That should essentially mean that when he has invested in shares that he expects will zoom and those share prices drop 30% soon after he buys them, he will average his cost by buying more. Letus assume that he is willing to take the volatility for the desired growth and he is confident of his decisions.

Moving on that assumption, Stocks can give you that growth. But since we cannot identify the 5-6 stocks that will give a growth of 150-200% over a period of 30 months, we need to ride the waves on the stock market.

The first magic happened today morning when I looked at a blog/site that I had been avoiding (Because I understood little of that). It’s EagleEyeTrade by Rajeev Mundra.

Talking to Rajeev who runs a Technical Trading seminar too, I did some number crunching. Assuming a challenging but realistic goal of 10% growth every month, a starting amount of Rs 6,25,000 will become Rs 1.09 crore after 30 months. Vow!!!

Atleast, theoretically it’s possible. Ofcourse it will take a lot of guts (time & energy too). It depends on Gaurav’s risk appetite. And Rajeev’s expert guidance. If you ask me, the guys can do it. I wish them Good Luck.

For the first time I’m putting a disclaimer. Here it is: Ideas posted on the blog are educative in nature and must not in any way be construed as advice or recommendations. Investing/Trading in financial instruments is risky. This blog cannot be held liable in anyway for losses incurred.

Slideshare is a wonderful way of sharing your slides and powerpoint presentations. It is a place to share and discover slideshows. You can embed the slideshows in your blog, tag, comment and have fun.

I have embedded a presentation I have made on “Taking responsibility for your finances”

Click here for the slides

What do you have to say? Please subscribe by Email or Feeds

Investing in the equity market directly is exciting and sexy. You are in the thick of things and are able to take responsibility for yourself. Though the volatility and the information overload makes it a daunting task.

How about investing through Mutual finds? Doesn’t it have its own loading and administrative charges and the fund managers making merry on your hard earned money? And can’t we see the best performing mutual funds and follow their portfolio?

Here are some points to ponder:

We should allocate our time to investment decisions in proportion to our income generation goals.

Convenience and hassle free investing should be a major factor.

Fund managers are into it full time. If we able to identify fund managers who have consistently performed over last 3-5 years, nothing like it.

The fund manager also has the muscle power of crores of Rupees and is able to take entry and exit decisions impartially.

MFs continuosly churn their portfolio. When MFs buy and sell stocks, they don’t have to pay capital gains as you do when you churn.

We are likely to panic over market crashes. MFs can take advantage of a crash!
With Systematic Investment plans (SIP), you can start investing with as low as Rs 500 per month.

There is another financial product called ETF: Exchange Traded Funds. They are the least expensive and manage themselves on their own.

Take your call.

The Little Book of Common Sense Investing is an amazing book by John Bogle. Read this about the book you can buy on Amazon.

Investing is all about common sense. Owning a diversified portfolio of stocks and holding it for the long term is a winner’s game. Trying to beat the stock market is theoretically a zero-sum game (for every winner, there must be a loser), but after the substantial costs of investing are deducted, it becomes a loser’s game.

Common sense tells us—and history confirms—that the simplest and most efficient investment strategy is to buy and hold all of the nation’s publicly held businesses at very low cost. The classic index fund that owns this market portfolio is the only investment that guarantees you with your fair share of stock market returns.

To learn how to make index investing work for you, there’s no better mentor than legendary mutual fund industry veteran John C। Bogle. Over the course of his long career, Bogle—founder of the Vanguard Group and creator of the world’s first index mutual fund—has relied primarily on index investing to help Vanguard’s clients build substantial wealth. Now, with The Little Book of Common Sense Investing, he wants to help you do the same.

Some excerpts from the book:

Index funds eliminate the risks of individual stocks, market sectors, and manager selection.

Only stock market risk remains.

Don’t allow a winners game to become a loser’s game.

Fund investors are confident they can easily select superior fund managers. They are wrong.

The stock market is a giant distraction.

If the data do not prove that indexing wins, well, the data are wrong.

It’s amazing how difficult it is for a man to understand something if he’s paid a small fortune not to understand it.

The miracle of compounding returns is overwhelmed by the tyranny of compounding costs.

Interesting!! What do you think? Waiting to hear your comments.

Basically, Exchange Traded Funds (ETFs) are open-ended index fund that can also be traded on the stock market.

Compared to Mutual funds, there are many advantages of ETFs, one is real time pricing, secondly long term investors are protected from short term traders. Hence it proves to be an ideal instrument for both long term as well as short term investors and also it is easy to buy and sell from the exchange.

One major disadvantage of ETF is that the investor should have a demat account and a broking account.

There are two types of advantages over index funds - one is the expense ratio which is currently lower in ETFs as compared to normal index funds. The second advantage is the distribution costs- the other index funds have to pay trail commission to the broker, while ETF does not pay the same. So the ETF cost will be lower.

In addition to the above-mentioned expenses, there also exist some `hidden’ costs like transaction costs. Such costs do not form a part of the expense ratio like brokerage and STT. The transaction costs however, are incurred by index funds but not by ETFs. This is another area where ETFs score over regular index funds.

ETFs don’t incentivise their product, which other regular mutual funds can do, hence there is no one pushing it.

But internationally what has happened that over a period of time people have found out that ETFs are ideal instruments and it has become more popular.

In India the ETFs have outperformed the actively managed funds over the last year.

Even though the actively managed funds have done better on a 3/5 year scale, the net difference would be lower or non existent because of the higher cost. The active funds charge you 2-2.5% while the ETFs charge around 0.5% only. The extra Fund management charges will even out the difference, I guess.

I wonder why a good product like index funds does not sell like hot cakes. Comparatively an expensive product like ULIP is selling like hot cakes even though it is much more expensive than the MFs??!!

I guess it boils down to lack of knowledge/information and that the agents have no interest in selling them.

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