Gold ETFs are open-ended mutual funds that have gold as the underlying asset. Their value is based on the price of physical gold. One gram of gold equals one unit of the gold ETF. Investors investing in gold ETF have the benefit of participating in the market as well as investing in gold. Asset management companies allow investors to redeem their investments in unit form. If an investor is holding a specific value of gold in ETF form, he/she can redeem it in physical form.
Gold ETFs are traded on NSE in India and other exchanges globally. Hence, it is easy for an investor to buy and sell it on various stock exchanges globally. Some ETFs also invest in gold bullion. 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 and no tension of theft and loss of gold.
The key features of gold ETFs are:
In India, gold is not just seen as an investment, but as an auspicious item to own. The purchase of physical gold has reduced a lot after the demonetization announcement in India. Gold ETFs aren’t capable of replacing physical gold entirely, but they have few benefits over physical gold.
Who Should Invest in Gold ETF?
Investors who are looking for investing in gold for the long-term but do not want the hassle of physical storage and looking for tax benefits can invest in gold ETFs. Investors looking for smaller investment options can also invest in gold ETF. They can buy as low as one unit (one gram).
Gold ETFs invest in physical gold bars with 99.5% purity. These can be bought and sold anytime on the trading platform. Unlike physical gold, the prices of gold ETFs are the same across India. With a Demat and Trading account, an investor can purchase Gold ETFs on BSE/NSE. Gold ETFs attract brokerage and fund management fees.
As Gold ETFs are backed by physical gold, they are better used as an instrument to benefit from gold prices instead of buying physical gold. While liquidating Gold ETF investments, the investor is paid at the market price of the gold. Asset Management Companies (AMC) also allow Gold ETF redemption in unit form. In other words, if an investor is holding Gold ETFs equivalent of 1kg gold, or in multiples thereof, their redemption can be in physical gold form.
Gold ETFs do not have any entry or exit loads. However, the expense ratio for Gold ETFs is capped at 1%. They also attract brokerage cost, each time the units are bought and sold.
Gold EFTs are a tax-efficient way to hold gold. There is no wealth tax, no security transaction tax, and no GST. 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, income is taxed at 20.8% (including cess) with indexation benefits.
Gold ETFs in India were first proposed by Benchmark Asset Management Company Pvt. Ltd. In the year 2002. But it was only approved by SEBI and launched in the year 2007. The National Stock Exchange (NSE) is the platform on which gold ETFs can be traded. Leading asset management companies now have multiple gold ETFs listed on the NSE to be bought and sold by investors.
Gold as an asset has always been a good investment. The returns from gold were the highest during the 2008 stock market crash. Gold is one commodity that generally acts inversely to the stock market. Over the years, the stock markets have picked up the pace, and the returns from equity were quite good. This led to falling gold prices and lower returns from gold funds. But any commodity is prone to seasonal cycles, and hence the prices of gold picked up. In 2019 alone, gold prices have skyrocketed, leading to excellent returns from gold ETFs and gold funds.
However good the returns are from gold funds or ETFs, gold can only act as an insurance cover. It is suitable for conservative investors or for those who are looking to beat inflation in the long term. Ideally, only 10-15% of the assets have to be allocated to gold. Anything more can lower the returns of the portfolio.