Partial redemption, savings on making charge key benefits of gold ETFs

Jun 10 2014, 08:53 IST
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SummaryIf I invest in overseas stocks through mutual funds in India, do I still need to pay short-term capital gains tax on selling?

If I invest in overseas stocks through mutual funds in India, do I still need to pay short-term capital gains tax on selling? what are the risks associated with these funds?

—Subir Bose

Global feeder funds are taxed just like debt funds. You will be subject to a marginal tax rate for short-term capital gains incurred if you sell these funds within a year. As far as the risks are concerned, these funds are exposed to the market risks of the geographies they invest in. For example, the performance of a global fund investing in the US would depend largely on the outlook for the US economy and the performance and valuations of the companies it invests in. Another risk you need to be cognisant of is exchange rate risk. These funds could underperform when the rupee is appreciating even if the portfolio is doing well.

In gold ETFs, do fund houses buy physical gold as the underlying asset? If yes, what is the advantage for the investor? one could just buy gold coins and put them in the locker. That will save fund house charges.

—Aman Sharma

There are three advantages. One, gold ETFs can be kept safely in your demat account. As an investor, you need not worry about its security. Two, there is no making charge (or premium) that a jeweller/bank will charge. This premium sometimes tends to be in the region of 3-5%, which adds to costs. The charges which you need to pay while buying an ETF are the commission (paid to the broker), and maintenance charges for the demat account, which tend to be much lower than this premium. Three, you can partly redeem your investments — so, if you buy 10 units of a gold ETF (instead of buying a 10-gm coin) and want to sell off five units (equivalent of 5 gm), you can do that easily in case of an ETF.

How do fund houses generate higher returns from debt funds? Aren’t the coupon rates the same, or even

higher, for retail investors?

—Pradeep Rao

There are 2-3 ways in which fund houses generate higher returns. One, they can buy paper that is cheap (or offers better yields) and sell paper that is expensive (or offers lower yields). This trading in paper can generate additional profits, which a retail client may not be able to earn. Fund houses sometimes tend to have access to paper like securitised debt or

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