For Indian investors, gold has been a favorite investment instrument and it is for a good reason as well. Gold has proved an efficient ally against inflation and equity market downturns. Recently, gold is returning better than debt or equity investments and hence it has been one of the best performing asset class. It does not come as a surprise that investors are getting more and more focused on gold for getting stable and even better returns.
Gold – a safe bet
Gold counters the effects of exchange rate fluctuations and inflation quite efficiently. Hence, it is considered the strongest among the asset classes. If we compare the performance of gold and equity in the year 2007-2012, we will see that equity has delivered an annualized return of just 2.67% (according to BSE Sensex), whereas gold has delivered 27.19% annualized return over the same period.
In the long-run, equity has the ability to overpower any asset class, but in the short to medium term, the stock market is prone to high volatility. It has been proven that Gold has a weak correlation to equity, making Gold an ideal asset for diversification. Hence, the presence of Gold in a portfolio makes it more resilient and stable to market fluctuations or volatility.
One of the best ways to invest in Gold is via ETFs. Let us understand the meaning of Gold ETFs, benefits of investing through ETFs and how to go about it.
Meaning of Gold ETF
ETFs or Exchange Traded Funds are open-ended funds that trade on a stock exchange like the shares of any company. Each unit of an ETF represents a portfolio of stocks unlike the share of an individual company. Therefore, it is similar to a unit of an open-ended mutual fund but with a huge difference – the unit of an ETF trade on an exchange unlike an open-ended mutual fund. Just like a share, the units can be sold short or margined and during market hours, the investors can trade ETF.
Gold ETFs are exchange traded funds meant to track the price of physical gold. Gold ETF lets the person own gold in Demat form. Each unit of the ETF allows the investor to own 1 gm of gold without physically owning it. Hence, investing in gold ETF gives the advantage of marketability and liquidity – a limitation of owning physical gold.
Since, a person can trade in gold ETF at any time during the market hours, it is liquid. And, it is marketable as a person can trade any amount just like a normal stock including short buying and selling on margin. Also, owning Gold ETF is cheaper than owning physical gold because it has no cost of storing physical gold.
Investment and Trading in Gold ETF
The procedure for investing in Gold ETF is very easy. An investor just needs an online trading account with any broker. An investor must have a demat account to buy a Gold ETF, and if he/she has the account ready, then they just have to choose the Gold ETF and place the order online from the broker’s trading portal. Then, the orders are routed to the exchange, where the sell and purchase orders are matched. A confirmation is sent back to the investor later.
Trading Gold ETF is as easy as trading a stock. By accessing an online trading account, an investor can buy and sell at any time. Investors are allowed to invest in Gold ETFs either by using SIP or in lump-sum.
Benefits of Gold ETFs
Gold ETFs give investors an opportunity to accumulate gold over a period of time. An investor can plan the procurement as per his/her future requirements as Gold ETFs can be bought in small quantities. Also, there is no risk of theft and worry about storage cost as units are held in demat or paper form.
People end up paying extra for making charges in case of physical gold, but in gold ETFs, no extra charge is applicable. The investor can exchange the funds in multiples of 1 kg units of 0.995 purity, whenever they need. Gold ETFs can be sold across India at transparent prices unlike gold coins or bars for which the jewelers offer only an exchange and not a buyback.
Gold ETFs are ahead of the physical gold in terms of taxation benefits as well. No VAT, securities or sales tax is applicable on gold ETFs. Gold ETFs are eligible for the long-term capital gains after one year as units of such funds are traded like stocks on the exchange. Physical gold, on the other hand, is eligible for long-term capital gains only after three years. Investors do not have to pay wealth tax on Gold ETFs unlike physical gold.
Drawbacks of Gold ETFs
In case of Gold ETFs, the above given benefits come at a cost. At the time of buying and selling Gold ETFs, additional costs are involved in the form of commission or brokerage. The fund house charge a small asset management fee, so the return is a little less than the actual increase in the Gold price.
Also, some ETFS are liquid and this impacts their buying and selling liquidity. Thus, the investors should stick to funds that are liquid when they are investing in Gold ETFs.
Why should you invest in Gold ETF?
Unlike other ETFs, Gold ETFs provide an efficient and effective platform for small investors to diversify into Gold. Gold ETFs are better than other traditional forms of investing in Gold because there is no worry on adulteration or impurities and they are extremely liquid.
| List of Gold ETFs in India | ||||
|---|---|---|---|---|
| Issuer | Name | Symbol | Underlying | Launch Date |
| Axis Mutual Fund | Axis Gold ETF | AXISGOLD | Gold | Nov 2010 |
| Birla Sun Life Mutual Fund | Birla Sun Life Gold ETF | BSLGOLDETF | Gold | May 2011 |
| Canara Robeco MF | Canara Robeco Gold ETF | CANGOLD | Gold | Mar 2012 |
| Goldman Sachs Asset Management | Goldman Sachs Gold Exchange Traded Scheme | GOLDBEES | Gold | Mar 2007 |
| HDFC Mutual Fund | HDFC Gold Exchange Traded Fund | HDFCMFGETF | Gold | Aug 2010 |
| ICICI Prudential Mutual Fund | ICICI Prudential Gold Exchange Traded Fund | IPGETF | Gold | Aug 2010 |
| IDBI AMC | IDBI Gold ETF | IDBIGOLD | Gold | Nov 2011 |
| Kotak Mutal Fund | Kotak Gold Exchange Traded Fund | KOTAKGOLD | Gold | Jul 2007 |
| Quantum Mutual Fund | Quantum Gold Fund (an ETF) | QGOLDHALF | Gold | Feb 2008 |
| Reliance Mutual Fund | Reliance Gold Exchange Traded Fund | RELGOLD | Gold | Nov 2007 |
| Religare Mutual Fund | Religare Gold Exchange Traded Fund | RELIGAREGO | Gold | Mar 2010 |
| SBI Mutual Fund | SBI Gold Exchange Traded Scheme | SBIGETS | Gold | Apr 2009 |
| UTI Mutual Fund | UTI GOLD Exchange Traded Fund | GOLDSHARE | Gold | Mar 2007 |