Gold is one of the most sought-after investment classes in India. If you didn’t already know, India and China are among the countries that consume gold the most. So small wonder, there are jewellery stores in every nook and corner of the country.
However, storing gold is not an easy task and it might cost you too (if you take up that bank locker). Also, selling physical gold isn’t easy and you might have to sell at a much lower value due to wastage, making charges and other such costs you incurred while purchasing the jewellery. This is why investing in gold through Exchange Traded Funds (ETF) may be an attractive option.
What is Gold ETF?
Gold ETF is a fund that tracks physical gold prices so that your fund returns mimic those from physical gold. ETF is very similar to buying gold in electronic form. Note that gold ETFs are backed by actual physical gold of the highest purity. When you purchase one unit of gold ETF, it is equal to purchasing a gram of gold. Benchmark Mutual Fund, launched the first gold ETF in India way back in 2007.
ETFs are not bought and sold like mutual funds. ETFs are listed on stock exchanges and are bought and sold like stocks. At present, there are more than a dozen gold ETFs in India. Most of them offer units where one unit of the fund is equal to one gram of gold. However, there are a few where one unit of the fund is equal to half a gram of gold. You can choose to invest in these funds at different price points so that your cost of acquisition is averaged out.
Gold ETFs are managed passively. This means that there is going to be no active buying and selling of gold.
This is why gold ETF returns will closely follow that of physical gold in the Indian market. However, the net asset value (NAV) of every gold ETF might not be the same. Want to know why? Let’s find out.
Why the NAVs differ
Typically, a gold ETF will not only buy gold, it will also invest in other securities. This will include assets like bonds and government securities. There will also be times when the ETF books profits in gold and holds cash to buy gold at lower rates. This is the reason why the NAVs of all gold ETFs are not the same.
Another important point is that there are many expenses that a fund incurs for managing the fund. These are different for different fund houses. What are these expenses? Usually, these expenses include charges for buying and selling gold, brokerage charges for buying and selling securities, custodian charges and Goods and Services Tax (GST), if applicable. These are usually termed as fund management expenses.
As you might know, the expenses incurred are adjusted towards the NAV of the fund. For instance, the NAV of Kotak Gold ETF stands at Rs 264.71 (as of November 27, 2017) while that of ICICI Prudential gold iWin ETF is Rs 272.6. As you can see, the differences in NAV are minimal. This is only if the gold ETFs have the same unit value.
How to buy
Before choosing to invest in gold ETFs, there are some points that you need to keep in mind.
Costs – As mentioned earlier, all funds incur expenses and this will reduce your returns. As is obvious, you should go for funds that have the least expenses. For this, you need to check the fund’s expense ratio. The lower the expense ratio, the better it is.
Errors – Gold ETFs track physical gold. For this purpose, all gold ETFs will use a benchmark. Obviously, the funds will not generate returns that are exactly the same as the benchmark. There will be some difference. This difference between the returns and the benchmark is called tracking error. Funds should have low tracking errors.
Easy way out – Since gold ETFs are traded on stock exchanges, you should find out how often they are traded. The more the trades the better for you. If the trading volume is high, you will be able to quickly sell your ETF when you need money. So, check the ETFs’ trading volume.
The best part is that you don’t need to pay wealth tax for gold ETFs unlike for physical gold. You don’t need to pay Securities Transaction Tax (STT) too. However, the capital gains tax on gold ETFs is similar to that of debt funds. Units held for less than three years is treated as short term and will be taxed as per your tax slab. Units held for more than three years will be treated as long term and will be taxed at 20% with indexation benefits.
In conclusion, gold ETFs are easy to invest in, are convenient to trade, and give returns that match that of physical gold. So, if investing in gold is what you want, you could choose gold ETFs to achieve that objective.