Budget 2005 has proposed to introduce Gold Exchange Traded Funds (ETFs) in India. Their introduction is expected to increase investor participation in the gold market in the country. This cover story discusses the gold market in India, how Gold ETFs are created and operated and other issues involved in introducing them.

"Every individual is a potential gold buyer, although he may not need the gold. It may be added to the store of personal wealth, and passed from generation to generation as an object of family wealth. There is no other economic good as marketable as gold." Hans F Sennholz (Consultant, Author, and Lecturer of Austrian Economics).

Finance Minister P Chidambaram, in his Union Budget for 2005-06 proposed to the market regulator Sebi, in consultation with the Reserve Bank, to permit mutual funds to introduce Gold Exchange Traded Funds (GOLD ETFs) with "gold" as the underlying asset. According to the Budget proposal, the scheme would enable households to buy and sell gold in units for as little as Rs. 100 and such units could be traded in the same manner as units of mutual funds.

Investing in gold is one way of imparting stability to the investors' portfolio. Investment in gold is recommended for diversifying the portfolio as gold has proved its value. Gold is also the preferred investment in times of political and economic uncertainties. Investment in gold is done in many ways: Buying gold certificates, gold coins, gold bullion, gold futures and options and buying stakes in gold mining companies.

The gold consumption in India grew rapidly after the removal of import restrictions during the reforms era. According to WGC, before 1990, the demand for gold in India was a little over 230 tonnes per year and the current demand is over 800 tonnes. About 80% of the gold is used for jewelry fabrication, 15% for investment and 5% for industrial use. Prior to economic reforms, the investors had few investment opportunities in the bullion market. Still, gold was the most preferred investment option after bank deposits and equity markets.

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