MC
Review | Gold BeES gets budget boost: Should you invest?
Mon
July 29 2024
Gold Exchange-Traded Funds (ETFs) are now more
appealing after Budget 2024. According to the new tax structure, the gain from
the sale of units of gold ETFs will be subject to a capital-gain tax of 12.5
percent, if held for more than a year. Earlier, irrespective of the holding
period, gains were taxed at the slab rates.
Gold ETFs are passively managed mutual fund
schemes investing in standard gold bullion of 99.5 percent purity. They track the
domestic price of gold closely. Gold mutual funds, on the other hand, are fund
of funds (FoFs) that invest in gold ETFs.
Currently, there are 17 Gold ETFs. Nippon India
ETF Gold BeES (Gold BeES), a MC30 pick, scores on all the parameters, including
higher liquidity in the exchanges and lower tracking error.
Gold
ETFs are likely to attract more inflows now
Budget 2024 has made it clear that Gold ETFs are
brought under the capital-gain regime. Arun Sundaresan, Head, ETF, Nippon Life
India AMC, says, “Since gold ETFs are listed on exchanges, investors can now
avail of long-term capital gain (LTCG), if the asset is held for 12 months.
This will be applicable for transactions from April 1, 2025, onwards”.
Short-term capital gain (STCG) would be taxed at
the applicable slab rate. On the other hand, since gold FoF are not listed,
investors can claim LTCG, if they've held the asset for two years, adds
Sundaresan.
Cut in customs duty: an opportunity for new investors
Another big move in the Budget was a reduction on
the basic customs duty on gold and silver from 10 percent to 6 percent and
Agriculture Infrastructure & Development Cess (AIDC) from 5 percent to 1
percent. It will effectively reduce the overall taxes on gold from around 18.5
percent (including GST) to 9 percent.
Chirag Mehta, CIO, Quantum AMC, says that this
could lead to a commensurate decline in gold prices. “For investors who owned gold,
this reduces their returns to that extent. But for investors who have yet to
allocate to gold, this provides an opportunity to allocate at much lower gold
prices due to the reduction in duties”, Mehta adds.
Don’t
go overboard, gold is just an asset allocator
As an asset class, gold has done exceedingly well
over the last few years. The gold ETFs category has delivered a compounded
annualised return of 13 percent in the last one year. Factors that drove gold
prices include buying by more central banks, geopolitical uncertainties,
moderating US retail inflation numbers and anticipation of a less aggressive US
Federal Reserve. Some catalysts that could push gold prices back up are a weak
dollar, festive time demand, US elections, geopolitical risk and central bank
policies, points out Jigar Trivedi, senior commodities analyst, Reliance
Securities.
Gold may not be an outperforming asset class all
the time but it is a hedge against market uncertainties and a useful portfolio
diversifier. It can account for 5-10 percent of your portfolio at any point of
time.
Gold ETF is a good option to invest in the
yellow metal. Gold ETFs are passively managed mutual fund schemes traded on the
NSE and BSE, just like equity shares. Investors can buy and sell them at any
time during market hours, using their demat account.
MC30 -- the curated basket of 30
investment-worthy mutual funds -- recommends Nippon India ETF Gold BeES (Gold
BeES) under the passive funds’ category.
How to pick a gold ETF? Look at its size (the
larger the better), liquidity in the secondary markets, tracking error (TE),
expense ratio, impact cost and premium or discount of the spot price to its
NAV.
Gold BeES scores on all counts. Liquidity or the
trading volume plays an important part in ETF selection to buy and sell at the
right prices. The average daily total volume traded in Gold BeES on the NSE
over the last one year was Rs 31 crore, the highest among Gold ETFs.
During trading hours, the spot price of ETFs
may trade at a premium or discount to their iNAVs (indicative NAVs). This
occurs due to illiquidity and less-active market makers. Market makers are
authorised participants appointed by the AMCs to keep the spot price close to
the fair value. If the price of the ETF trades above its iNAV, the ETF is said
to be trading at a ‘premium’ and if the price is below its iNAV, it is said to
be trading at a ‘discount.’ This leads to a higher impact cost. Gold BeES has
an impact cost of 0.02 percent (as of July 2024, on the NSE) and is the lowest
among Gold ETFs.
Gold FoF invests predominantly in Gold ETFs
only. Investors without demat accounts can consider buying gold FoFs. The good
part about gold FoFs is that they allow systematic investment plans (SIPs).
ETFs don’t allow SIPs. You can start your SIP in a gold fund with as little as
Rs 500 a month. Nippon India Gold Savings Fund invests mainly in Gold BeES.
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