Gold funds, which are making waves abroad, may soon land up in India.
The finance minister said that he would request Securities and Exchange Board of India to permit mutual funds to introduce a gold exchange traded fund scheme to enable households to buy and sell gold in units for as little as Rs 100 ($2.2).
Abroad, individuals invest in gold either by buying the stocks of gold mining companies or investing in open-ended mutual funds that buy such stocks.
In India, individuals hold gold by either buying gold bars, coins or jewellery.
Well, now there is another option. The gold exchange traded funds.
Exchange traded funds are similar to index funds but are traded more like a stock. They represent a basket of securities that are traded on an exchange. A gold exchange traded fund will represent gold as the underlying security.
Relatively new, such funds currently exist in three continents. They were launched in 2003 in London and Australia and only last year in New York.
According to Sanjeev Aggarwal, executive director, World Gold Council, India, "Around Rs 13,000 crore (Rs 130 billion) is currently being held globally with Gold Exchange Traded Funds."
Here's how the funds work
The fund actually buys gold and holds it as the underlying security. And a share represents one tenth of an ounce of physical gold. The value of the share will be at the current global price of gold.
Just like a mutual fund, the value per share will be the total value of gold held divided by the number of shares, less the trust's expenses and liabilities.
Why would anyone buy these investments rather than gold bars and coins? As Aggarwal says, "it is the most efficient, cost effective and convenient way to invest directly in gold bullion".
Aggarwal also feels that it is a good way to channelise the unofficial money circulating in the economy into the structured financial system. A substantial part of black money does find its way to the local jewellery and a bank safe full of jewellery.