Gold ETF (Exchange-Traded – Funds) have been gaining traction from investors amid increased risk-aversion as the coronavirus pandemic severely hit the global equity market and economy.
Gold has given an average return of 14.10% annually since 1973 in rupee terms, as per the World Gold Council Report issued on 24th March 2020 India edition.
The category has been one of the better-performing asset classes over the last one year. The best way to invest in gold in the current situation is to go with Gold ETF. In this article, we are covering the following topics.
Table of contents… 1. What is Gold ETF and How does it work 2. Who should invest in Gold ETF? 3. Benefits of investing in Gold ETF 4. Gold ETFs work best in times of global uncertainty 5. Taxation on Gold ETF 6. Listed Gold ETF funds on NSE 7. Final words…
What is Gold ETF and How does it work
Gold ETFs are open-ended mutual fund schemes that have gold as the underlying asset. Gold ETFs are an excellent choice for investors who want to invest in gold for the long term to beat inflation. They come with uniform purity (99.50%) and no tension of theft and loss of gold.
Gold ETFs allow investors to participate in the gold market easily and offer transparency, cost-efficiency and a secure way to access the gold market. They also provide the benefit of liquidity as it can be traded at any time during the trading period. The value of ETFs increases and decreases proportionally with the price of physical gold.
Gold ETFs allow investment in gold in small denominations (1 gram), which makes it easier for the investor to participate. On the listed browser, the minimum lot is one unit. 1 Unit of Gold ETF is equal to 1-gram gold. This enables the investor to accumulate units over time and reap the benefits of rupee cost averaging. The units can be redeemed either from the mutual fund directly or from the exchange.
Who should invest in Gold ETF?
- GOLD ETFs are suitable for those investors who want to diversify their portfolio by allocating a certain amount towards gold should buy gold. Ideally 10% to 15% of their total investment portfolio.
- Individuals who do not want to own the actual commodity but want to boost their income by trading on the precious metal should invest in these types of exchange-traded funds.
- It is ideal for a long-term investor and wants to accumulate wealth for the long term.
- Gold ETFs funds do not have any entry and exit load. Investors only have to pay a minimum brokerage on transactions. which makes them suitable for individuals who want to save more on commission charges.
- Investors should keep an important thing in mind that they will not get physical gold but only cash equivalent at the time of redeeming the units. Hence, any investor who wants to hold gold for purely investment and hedging purposes can look at gold ETFs. For those who want to accumulate physical gold, Gold ETFs are not the right instrument for them.
Benefits of investing in Gold ETF
Gold is considered as a Global Asset Class and there are ample reasons why GOLD is a must in every retail’s investors portfolio.
- The purity of the gold is guaranteed and each unit is secured by physical gold of high purity. No worry about adulteration or impurities.
- Cost-effective: Golf ETFs do not attract making charges like physical gold in the form of jewellery or bars. You can purchase it at international rates. Hence, there are very cost-effective as compared to physical gold.
- Transparent and real-time gold prices. Just like stocks & shares, gold prices on the stock exchange are also available publicly and can be seen at any time.
- Listed and traded on the stock exchange. 1 Unit of Gold ETF is equal to 1-gram gold.
- A tax-efficient way to invest in gold as the income earned from them is treated as long term capital gain. No Security Transaction Tax (STT), no Wealth Tax, no VAT, and no sales tax.
- ETFs are Safe and secure as units are stored electronically in a Demat form. Costs involving safekeeping of physical gold like locker charges are not required with Gold ETFs.
- Gold ETFs are accepted as collateral for loans.
- No entry and exit load.
Risk associated with Gold ETF
Gold ETFs are subject to market risks. There is no other factor that impacts the price of Gold ETF other than the price of physical gold. The value of gold ETF increases and decreases along with the price of physical gold.
Gold ETF is regulated by SEBI and every unit of Gold ETF is secured by equivalent physical gold.
Gold work best in times of global uncertainty
This is something that you will get to see time and again. Gold prices tend to increase in times of economic and geopolitical uncertainty. The majority of investors see gold as insurance against the bad central-bank policy, high government spending, and financial instability.
The price of gold can rise significantly if major currencies, like dollar, tend to fall weak.
Crises such as wars and political instability, which have a negative impact on prices of most asset classes, have a positive impact on gold prices since the demand for gold goes up as investors see gold is a safe haven for parking funds. Gold is the only medium of exchange completely free of credit risk as it does not imply liability for any other entity.
Taxation on Gold ETFs
Gold EFTs are a tax-efficient way to buy and hold gold. Gold ETFs are not required to pay STT. STT is only imposed on equity and equity-related products. Since Gold ETFs are classified as non-equity products, they do not attract STT.
Income from Gold ETFs is taxed at the investor’s income tax slab rate when held for less than 36 months. For investments over 36 months, LTCG will continue to be taxed at 20% after considering indexation benefit.
Investing in physical gold can make an individual liable to pay wealth taxes, especially if he or she purchases a lot of gold Jewellery or gold bullions. Gold ETF investment do not attract any wealth taxes, which makes it better for tax saving.
TOP Listed Gold ETF funds on NSE
Benchmark Mutual Fund launched India’s first gold Exchange-Traded Fund (ETF) on 15 February 2007 followed by UTI Mutual Fund’s gold scheme on 1 March 2007. At present, there are 12 Gold ETF funds are listed on NSE. The list of all 12 Funds are as under:
Gold ETFs listed on NSE
|Sr No||Issuer||Gold ETF Name||Launch Date|
Axis Mutual Fund
Birla Sun Life Mutual Fund
Canara Robeco MF
Canara Robeco Gold ETF
HDFC Mutual Fund
ICICI Prudential Mutual Fund
IDBI Gold ETF
Kotak Mutual Fund
Quantum Mutual Fund
Quantum Gold Fund (an ETF)
Reliance Mutual Fund
Reliance Gold Exchange Traded Fund
Religare Mutual Fund
Religare Gold Exchange Traded Fund
SBI Mutual Fund
UTI Mutual Fund
UTI Gold Exchange Traded Fund
We have seen that gold performed extremely well in all big crisis especially during the year 2000 the dot-com bubble, and in 2008 during the global financial crisis. The current situation due to Covid-19 (Corona Pandemic) is much bleaker than previous global financial crises.
The steep fall in the equity market has spared no one. No Portfolio is immune to the coronavirus-induced bloodbath on the stock exchange. We have also seen the negative pricing of crude oil, which has never happened in the history of mankind.
The ideal way to go for Gold ETFs is to focus on the fund with the lowest tracking error and highest volume.
It is advisable to keep the investment in gold within 10% to 15% of one’s total investment portfolio. That can also be used as collateral against loans if a situation arises.
Have a nice time………….