Gold ETF, also known as paper gold, is an open-ended mutual fund scheme that invests money collected from investors in standard gold bullion having 99.5% purity. Investors in Gold ETF will have their investment in the form of units of the scheme which is listed on the stock exchange. Each unit of the investors holding will typically represent one gram of gold. However, there are ETFs with lower denomination too. E.g. one unit of Quantum Gold ETF is 0.5 grams.
Gold is a proudly possessed asset by Indian’s mainly in the form of jewellery. To the advantage of gold lovers, the run in prices that gold has seen in the last couple of years, and particularly this year, surpasses the returns provided by any other asset class. This has created an attraction gold, mainly as an investment for asset allocation purposes, in addition to serving its usefulness for occasions and daily utility.
While jewellery serves its purpose for occasions such as weddings, it may not be the most preferred form, from an investment perspective, because of the concern on purity and also the fact that craftsmanship has to be paid for. At the time of sale, gold price is what you fetch based on the market rate, craftsmanship is not paid for, and so you end up losing the money paid for craftsmanship. If you’re looking at gold purely from an investment perspective (asset allocation), it may well be worth to explore Gold Exchange Traded Funds (ETFs) – a product introduced in 2007.
What is Gold ETF?
Gold ETF, also known as paper gold, is an open-ended mutual fund scheme that invests money collected from investors in standard gold bullion having 99.5% purity. Investors in Gold ETF will have their investment in the form of units of the scheme which is listed on the stock exchange. Each unit of the investors holding will typically represent one gram of gold. However, there are ETFs with lower denomination too. E.g. one unit of Quantum Gold ETF is 0.5 grams.
How is the safe keep of gold managed by the mutual fund company?
A custodian is appointed by the mutual fund company for safe keeping of the gold bought on behalf of the investors. The quality of the gold will be 99.5% pure which in other words means that it is 24 carat gold. The gold held with the custodian cannot be lent and will be fully insured.
What are the returns of Gold ETFs?
It is a passively managed fund, the objective being to provide returns that closely mirror the returns provided by Gold in the spot market. Hence the returns are more or less similar to that of physical gold. Thus when the price of gold increases the price of the ETF is also expected to increase by the same amount, and vice versa. Gold ETF provides you an opportunity to invest in gold without having to take a physical delivery of gold.
How do you buy Gold ETFs?
Gold ETFs are traded on the stock exchange and today most of them trade on the National Stock exchange (NSE). They are held in the demat form just like equities. Hence in order to purchase gold ETFs, you need to have a Demat account and also registration with a broker who is a member of the NSE.
Some of the Gold ETFs currently in the market include Gold BeEs, Kotak Gold ETF, Quantum Gold ETF, Reliance Gold ETF, and UTI Gold ETF.
What re the charges involved?
For Gold ETFs, you need to have a demat account and trading account with the broker for which you need to pay annual charges. In addition, for every transaction, investors will have to pay brokerage fee which ranges from 0.4% – 0.6% of the transaction value.
The fund also charges an expense ratio for managing the fund which is in the range of 1% – 2.5%
What is the tax treatment for Gold ETFs?
Investments in gold ETFs are eligible to tax treatments similar to that in of a debt mutual fund. Investment held for less than a year, attracts short term capital gain tax and the tax rate is depended on the tax slab the investor finds himself in. Investment held for more than a year attracts long term capital gains tax and is taxed at 20% with indexation benefit or 10% without indexation benefit, whichever is less.
Investment in Gold ETFs does not attract wealth tax because you do not hold gold in the physical form.
Advantages
- Allows small denomination purchase: Retail investors, who want exposure to gold in small amounts, can opt for Gold ETFs. It allows investors to buy one unit, which is buying 0.5 – 1 gram of gold depending on the scheme.
- Liquidity: Gold ETFs are can be bought and sold any time during the trading hours like equities at the price quoted on the exchange. This makes it a liquid investment instrument.
- Transparent Pricing: The price of ETFs is quoted on the stock exchange and there is a bid/ask during market hours enabling you to buy/sell at market prices. Thus you do not have to pay a premium while you purchase or a sell at a discount as in the case of jewellery or even sometimes coins and bars.
- Safety: Gold ETFs is essentially buying gold in paper form. So the investor does not have to take the trouble of safe keep of the gold. The custodian appointed by the mutual fund has the responsibility of taking care of the gold.
- Purity: Mutual funds are governed by SEBI and SEBI regulations require the purity of underlying gold in Gold ETFs to be 99.5% fineness and above. This spares investors the trouble of finding a reliable source to buy gold.
- Tax Efficient: Gold ETFs do not attract wealth tax. Besides, the investment is categorized as long term if it held for more than a year unlike physical gold where the period is 3 years.
Disadvantage
SIP (Systematic Investment Plan) option is not available with Gold ETFs. So if you want to make a monthly investment, you need to do it manually by buying units through your stock broker. The units will then get credited to your demat account.
Also investors need to pay brokerage, demat and trading account charges and expenses to the fund house. This may impact overall returns.
Why does gold ETF score over physical gold (jewellery, coins and bars) or commodity (gold futures)?
| Particulars | Physical Gold | Commodity | Banks | Gold ETFs |
| Pricing | Neither standard nor transparent | Transparent as it’s traded on the exchange | Not standardThere is a markup. | Transparent as it’s traded on the exchange |
| Cost of holding | High | High because of brokerage cost | High | Low |
| Quality | Uncertain- comes in varied carats | High | High | High |
| Liquidity | Moderate | High | Moderate | High |
| Safety | Storage risk | Storage risk if delivery is taken on expiry | Storage risk | No storage risk |
| Resale | Conditional and uneconomical | If delivery is taken, it can be uneconomical. No delivery would involve sale on the exchange and hence would be transparent. | Most banks do not purchase it back so it may be uneconomical | Sale on the exchange so it is transparent. |
| Wealth Tax | Yes | Yes | Yes | No |
| Short term capital gains | Applicable before 3 years | Gains are not categorized as short term. Purchase/sale without delivery is treated as speculative gain/loss. If delivery is taken, it is categorized as income/loss from business and taxed accordingly | Applicable before 3 years | Applicable before 1 year |
| Long term capital gains | Applicable after 3 years | – | Applicable after 3 years | Applicable after 1 year |
As an investment option in gold, gold ETFs are more attractive than physical gold or commodity or gold sold by banks because it does not attract any wealth tax. Besides, investors are freed from the headache of worrying about the quality, safety, transparency in price and resale value. From a tax perspective too, Gold ETFs are attractive. So let Gold ETFs be your next investment in Gold.