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Gold ETF - Gilt edged paper

| 1/2/2012 4:36 PM Monday

Gold ETF

India has an instinct to invest in gold and this is known to all. Indians had been on the forefront in accumulating the precious metal even at a time when gold was considered only for hedging and had not become an asset class. Today when gold has become one of
best asset classes in terms of returns that it provides, the appetite for gold has gone up even more with Indian investors. In addition to the physical gold, we now have one more option in gold ETFs. These are open ended mutual funds that invest your money in gold that is 99.9 per cent pure. This can be seen from the way assets under management of gold ETFs have risen over a period of time. In the past one year AUMs under gold ETFs have increased by 176 per cent to Rs 9568 crore (as at the end of November 2011) from Rs 3464 crore in November 2010. Gold ETFs are very new phenomena and are catching up now. Here is a short analysis of this option of taking exposure to gold without actually going through the worries of how to stock it safely.

Why buy Gold ETFs?

Gold ETFs have many advantages that make them a favourite among investors. They are listed on the stock exchange so you can buy and sell them like equities. They are very liquid by their very nature. They are extremely safe. Since they are not in physical form, you do not have to spend sleepless nights worrying about someone breaking into your home or bank locker. Gold ETF units represent gold that you own, in paper form. Retail investors can buy gold as little as one gram or less via this route. When you buy, you do not rub your head thinking about its purity. It is an exposure to 24 carat gold.

How to buy?

The best way to invest in Gold ETFs is by buying them on the stock exchanges BSE and NSE. For this, you need to have a DEMAT account. Note that there is no systematic investment planning or SIP available in Gold ETFs which you normally find in non-gold mutual funds. What this means is that you have to buy them each month on the stock exchange yourself. That can be a hassle as many investors would forget to do this each month. You could possibly give standing instructions to your broker to buy it for you. But it is advisable to avoid putting in a lump sum amount. Invest systematically so that you can use the benefit of rupee cost averaging.

What are the tax implications?

Taxation in gold ETFs is similar to that of a debt mutual fund. Investment held for less than a year attracts shortterm capital gain tax. Here the tax rate depends on the tax slab the investor falls in. Investment held for more than a year attracts long-term capital gains tax and is taxed at 20 per cent with indexation or 10 per cent without indexation, whichever is less.

Which Gold Exchange Traded Funds to invest in?


Many people often wonder which are the best gold ETFs in India? The best way to come up with the good ones is to look at the expense ratios of Indian gold ETFs (all the ones that exist). It is recommended to focus on the ones with lower expenses. Most of the gold ETF’s are trading at an expense ratio of one per cent with the only exception being Birla Sun Life Gold ETF which has an expense ratio of 1.44 per cent.

But, it should be noted that this ratio should not be the only thing that investors look at when deciding to invest in a fund. It is important for investors to also look at the volume data for gold ETFs. These figures should be investigated all the way back for at least a month or so. It is sometimes best to go with the an ETF that has the highest volume and largest margin which in this case is the Goldman Sachs Gold ETF (erstwhile Benchmark GOLDBEES). ETF gold investments are seeing a rise and will only continue to grow in the future as the value of the dollar (or traditional money) drops. Out of the total 12 gold ETF’s, eight have operation of more than one year. Out of these eight the Goldman Sachs Gold ETF has a turnover of more than Rs 6000 crore in the last one year while Kotak is in the
second spot with a turnover of Rs 1500 crore in the last one year. The least traded are the ICICI Prudential Gold ETF and Axis Gold ETF with turnover of Rs 45 crore and Rs 80 crore respectively.

Conclusion

Gold ETFs are becoming more and more popular because investing in precious metals such as gold is getting quite popular due to the high gold prices. But investing in gold requires special attention. What gold ETF funds do is to provide a method of investing in gold without having to physically have a pile of gold. You don’t have to worry about purchasing gold bars, putting them in a safe deposit box and safely selling them. This has been a plus point of investing in ETF’s. However, at this point of time it might be said that one is likely to look forward to invest in Gold ETF’s. We are saying this keeping in mind the time of the year where an individual looks forward to tax planning. Looking at the macroeconomic scenario one must look forward to invest in Gold ETF’s and keep aside a certain amount for
investing in a systematic way. Goldman Sachs Gold ETF and Kotak Gold ETF looks to be better keeping in mind the liquidity available in it.

 

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