Gold ETF – Exchange Traded Fund – What is and How to?

What is a Gold ETF?

A Gold ETF is an exchange traded fund, having the underlying asset as Gold. Thus the Gold ETF represents physical gold which may be in paper or in the dematerialised form. The advantage here is that the buyer of a Gold ETF doesn’t have to deal with the delivery of physical gold, but still can buy and sell it in the Stock market.

Smart Way To Invest In Gold

Not all the Gold ETFs have purely gold as their sole asset. In most of the cases, apart from having gold as a major asset, these funds might also have some Debt instruments and Cash as an asset. The proportion and the holding of these assets varies from every fund to the other.

What is the advantage of Gold ETF?

There are many advantages of investing in a Gold ETF rather than investing in Physical Gold. ETFs provide a completely transparent and convenient way of trading in gold for the investors. They provide a hassle free way of trading the yellow metal without incurring the costs associated in other forms of gold trade.

What does the price of 1 unit signify?

Theoretically, each unit of the Gold ETF represents 1 gram of gold. As the price of Gold increases or decreases, the unit price of the Gold ETF also fluctuates accordingly.

However the fund might also have other types of assets other than gold, as described in the previous section. Thus the prices of the Gold ETF units will vary from fund to fund.

Another major contributor to the variation of the unit prices, is the Expense Ratio for the fund. The operating expenses for every fund will vary widely. This factor will also affect the unit price of a Gold ETF.

How to buy and sell Gold ETF?

As with any other stock that is listed on the Stock exchange, Gold ETFs can also be bought or sold during the market hours of the exchange. Using the same mechanism for buying stocks, Gold ETFs can be bought and sold from the Stock Market.
Once purchased, the units of Gold ETFs will also be stored in the dematerialized form in your Demat account. You can sell it from this account

If You Want To Keep The Money You Made In Stocks, You Should Invest In Bonds.

What Are Bonds?

A bond is a debt security, similar to an IOU. Borrowers issue bonds to raise money from investors willing to lend them money for a certain amount of time.

When you buy a bond, you are lending to the issuer, which may be a government, municipality, or corporation. In return, the issuer promises to pay you a specified rate of interest during the life of the bond and to repay the principal, also known as face value or par value of the bond, when it "matures," or comes due after a set period of time.

Why Invest In Bonds?

If you want to make the most money, you should invest in stocks. But if you want to keep the money you made in stocks, you should invest in bonds.

It's ironic, but true: The most important asset class, bonds, is the one that has the lowest expected rate of return. At their core, bonds are quite simple. Yet decade after decade, investors tie themselves in rational and emotional knots trying to deal with bonds.

These days, most people are concerned that interest rates will soon rise. (This has been the case for much of the past 20 years, by the way.) Most investors know that higher interest rates will mean lower bond prices. So how can it make sense to buy bonds now?

Actually, it makes very little sense right now to buy or own bonds in the hope that you'll be able to sell them later at a higher price.

And that's exactly the problem that gets investors into trouble. They think that if you can't sell an investment at a profit, that investment is a bum deal. However, the truth is this: Making a profit isn't why you should own bonds.

For an analogy, think about an automobile. The reason to own a car is to go places. As everybody knows, that requires an engine. The moneymaking engine in most portfolios is made up of equities.

But would you drive a car that had no brakes? I doubt it. Bonds are like the brakes in a car. The analogy is imperfect, but the point is valid. Like the brakes in a car, bonds let you control the risk of owning equities.

For most people, the reason to own bonds is to mitigate equity losses during major market declines. Without this mitigation (and sometimes even with it), investors tend to panic when stock prices fall.

Instead of considering the possibility of buying more stocks at depressed prices, these skittish investors sell. They usually do so only after they have sustained major losses that they will never recover.

Here's why you should love bonds: They make the bad times better. Let me show you this with a few numbers.

From 1970 through 2014, a 100% bond portfolio had a compound return of 6.3%. A 100% equity portfolio, widely diversified, had a compound return of 11.8%. Obviously the equity portfolio had a much more powerful moneymaking "engine."

But the risk or volatility of the bond portfolio, measured in standard deviation, was only 4.1%; the figure for the all-equity portfolio was much less comfortable: 14.8%.

The all-equity portfolio was all engine, without any brakes. Its ultimate long-term returns were great. But without any brakes, that portfolio gave investors such a rough ride that many would have wound up on the sidelines.

The all-bond portfolio, on the other hand, had plenty of safety, but its engine was so weak that it would have failed to meet the long-term needs of many investors.

I said earlier that bonds are for the bad times — when stocks are losing money. The following examples illustrate this.

In the 45 calendar years from 1970 through 2014, the worst years for the diversified all-equity portfolio were 1974 (a loss of 22.6%) and 2008 (a loss of 41.7%). In 1974, bonds were up 6.5%. In 2008, they were up 7.1%.

Now, let's look at just those two very challenging calendar years and consider a portfolio that was split 50/50 between stocks and bonds.

In 1974, the loss in the 50/50 portfolio would have been 8.8% instead of 22.6%. In 2008, the loss would have been 19.9% instead of 41.7%.

In those bad years, bonds put on the brakes. And what about the good times? The two very best years for the all-equity portfolio were 1975, when it was up 44.5%, and 2003, when it was up 47.3%. A 50/50 portfolio returned 24.9% in 1975 and 23.3% in 2003.

Both those returns should be perfectly acceptable, in fact quite welcome, for long-term investors.

Peter Lynch and Warren Buffett both have said you shouldn't invest in equities unless you are willing to lose half your money along the way.

Even though most investors know about this risk, they try to put such unpleasant things out of their minds. When the market goes into a serious decline, many investors panic and wish for safety.

That safety is easily at hand, in the form of bond funds. If you have the right percentage of your portfolio in bonds, you're much more likely to stay the course. And if you stay the course, you're much more likely to be in the market when it's going up.

Understanding Rights Issues.

Cash-strapped companies can turn to rights issues to raise money when they really need it. In these rights offerings, companies grant shareholders a chance to buy new shares at a discount to the current trading price. Let's look at how rights issue work, and what they mean for all shareholders.

Defining a Rights Issue and Why It's Used

A rights issue is an invitation to existing shareholders to purchase additional new shares in the company. More specifically, this type of issue gives existing shareholders securities called "rights", which, well, give the shareholders the right to purchase new shares at a discount to the market price on a stated future date. The company is giving shareholders a chance to increase their exposure to the stock at a discount price.

But until the date at which the new shares can be purchased, shareholders may trade the rights on the market the same way they would trade ordinary shares. The rights issued to a shareholder have a value, thus compensating current shareholders for the future dilution of their existing shares' value.

Troubled companies typically use rights issues to pay down debt, especially when they are unable to borrow more money. But not all companies that pursue rights offerings are shaky. Some with clean balance sheets use them to fund acquisitions and growth strategies. For reassurance that it will raise the finances, a company will usually, but not always, have its rights issue underwritten by an investment bank.

How Rights Issues Work?

So, how do rights issues work? The best way to explain is through an example.

Let's say you own 1,000 shares in VT Telecom, each of which is worth rs 5.50. The company is in a bit of financial trouble and sorely needs to raise cash to cover its debt obligations. VT therefore announces a rights offering, in which it plans to raise 30 million by issuing 10 million shares to existing investors at a price of rs 3 each. But this issue is a three-for-10 rights issue. In other words, for every 10 shares you hold, VT is offering you another three at a deeply discounted price of rs 3. This price is 45% less than the rs 5.50 price at which VT stock trades. (For further reading, see Understanding Stock Splits.)

As a shareholder, you essentially have three options when considering what to do in response to the rights issue. You can:

 (1) subscribe to the rights issue in full,

 (2) ignore your rights or 

 (3) sell the rights to someone else. 

Here we look how to pursue each option, and the possible outcomes.

1. Take Up The Rights To Purchase In Full

To take advantage of the rights issue in full, you would need to spend rs 3 for every VT share that you are entitled to under the issue. As you hold 1,000 shares, you can buy up to 300 new shares (three shares for every 10 you already own) at this discounted price of rs 3, giving a total price of rs 900.

However, while the discount on the newly issued shares is 45%, it will not stay there. The market price of VT shares will not be able to stay at rs 5.50 after the rights issue is complete. The value of each share will be diluted as a result of the increased number of shares issued. To see if the rights issue does in fact give a material discount, you need to estimate how much VT share price will be diluted.

In estimating this dilution, remember that you can never know for certain the future value of your expanded holding of the shares, since it can be affected by any number of business and market factors. But the theoretical share price that will result after the rights issue is complete - which is the ex-rights share price - is possible to calculate. This price is found by dividing the total price you will have paid for all your VT shares by the total number of shares you will own. This is calculated as follows:

1,000 existing shares at rs 5.50 = rs 5,500

300 new shares for cash at rs 3 = rs 900
Value of 1,300 shares rs 6,400
Ex-rights value per share rs 4.92 (rs 6,400.00/1,300 shares)

So, in theory, as a result of the introduction of new shares at the deeply discounted price, the value of each of your existing shares will decline from rs 5.50 to rs 4.92. But remember, the loss on your existing shareholding is offset exactly by the gain in share value on the new rights: the new shares cost you rs 3, but they have a market value of rs 4.92. These new shares are taxed in the same year as you purchased the original shares, and carried forward to count as investment income, but there is no interest or other tax penalties charged on this carried-forward, taxable investment income.

2. Ignore The Rights Issue

You may not have the rs 900 to purchase the additional 300 shares at rs 3 each, so you can always let your rights expire. But this is not normally recommended. If you choose to do nothing, your shareholding will be diluted thanks to the extra shares issued.

3 Sell Your Rights To Other Investors

In some cases, rights are not transferable. These are known as "non-renounceable rights". But in most cases, your rights allow you to decide whether you want to take up the option to buy the shares or sell your rights to other investors or to the underwriter. Rights that can be traded are called "renounceable rights", and after they have been traded, the rights are known as "nil-paid rights".

To determine how much you may gain by selling the rights, you need to estimate a value on the nil-paid rights ahead of time. Again, a precise number is difficult, but you can get a rough value by taking the value of ex-rights price and subtracting the rights issue price. So, at the adjusted ex-rights price of rs 4.92 less rs 3, your nil-paid rights are worth rs 1.92 per share. Selling these rights will create a capital gain for you.

The Bottom Line

It is awfully easy for investors to get tempted by the prospect of buying discounted shares with a rights issue. But it is not always a certainty that you are getting a bargain. But besides knowing the ex-rights share price, you need to know the purpose of the additional funding before accepting or rejecting a rights issue. Be sure to look for a compelling explanation of why the rights issue and share dilution are needed as part of the recovery plan. Sure, a rights issue can offer a quick fix for a troubled balance sheet, but that doesn't necessarily mean management will address the underlying problems that weakened the balance sheet in the first place. Shareholders should be cautious.

Equity Funds And Types of Equity Funds

Equity Funds

A stock fund or equity fund is a fund that invests in stocks, also called equity securities. Stock funds can be contrasted with bond funds and money funds. Fund assets are typically mainly in stock, with some amount of cash, which is generally quite small, as opposed to bonds, notes, or other securities.

Types of Equity Funds

An equity fund (or stock fund) invests in equities such as common and preferred shares. Equity funds are considered to be the more risky than most other types of funds but they provide higher returns to investors.

There are many different types of equity funds, such as the follows:

Aggressive Growth Funds: This type of funds invests in small companies and businesses that are expected to grow very fast, for maximum capital appreciation. They are very volatile and risky.

Growth Funds: They invest primarily in the stocks of companies that show high potential for growth and are expected to significantly increase in share price.

Sector Funds: They invest in a group of companies that span different market segments and industries such as Banking, Information Technology, Health Care, Auto, etc.

Small-Cap Funds: They invest in smaller companies that have low market capitalization but with potential for substantial growth.

Option Income Funds: They invest in dividend paying common stocks on which options may by written and earn premium income on it.

Global Equity Funds: They invest primarily in foreign stocks across different countries.

Diversified Equity Funds: They invest in wide variety of stocks across different industries or sectors: services, manufacturing, infrastructure, technology, etc.

Value Funds: They invest in small-cap to mid-cap companies that have sound fundamentals and are considered undervalued today.

Equity Index Funds: They seek to match the performance of the selected stock market index.

Equity Income or Dividend Yield Funds: They invest in stocks that offer attractive returns in the form of dividend.

Thematic Funds: Unlike sectoral funds, thematic funds are more to do with a particular theme and not a specific sector. For instance, an infrastructure thematic fund invests in companies doing business with infrastructure construction projects, steel, cement, and the like. Here the companies may be from different sectors but are centred around a common theme. So, in a way, as compared to sectoral funds, thematic funds investments are broader, and thus offer more diversification than sectoral funds.

INVEST IN EQUITIES/EQUITY MUTUAL FUND:

Investing in equities over a long period is one of the best ways to stay ahead of inflation. Over the last 10 years, the Nifty has returned 16.7% a year compared to the 7% average inflation rate. One can either invest directly or through mutual funds. For small investors, it is advisable to invest through mutual funds, as they are managed by experts.

Investors should look at diversified equity mutual fund schemes to earn higher risk-adjusted returns. However, equity investments should have a horizon of at least three years, sometimes even longer.

Another way of lowering the overall risk is investing via systematic investment plans or SIPs. The compounding impact of such investments over long periods will help you beat inflation by a comfortable margin.

Should you consider direct equity or equity mutual fund

Direct equities: You should consider investing in direct equities if you have the time to actively monitor and research stocks, you have a reasonable knowledge about the financial markets and you have the patience to bear market volatility. In such cases, it is preferable to invest as lumpsum.

Mutual funds: You should consider investing in mutual funds if you do not have the time to actively monitor your investments and cannot bear market volatility. Also, you should invest in mutual funds from a more goal-oriented perspective and we think systematic investment plans (SIP) are the best way to invest in them to create wealth from your income saved over a long period of time.