Gold ETF: The best way to invest in gold now
Mon Dec 23 2024
Mrin Agarwal is a Financial educator, founder director of Finsafe India Pvt Ltd and co-founder of Womantra. DH Illustration.  The lack of issuances of sovereign gold bonds (SGB) and change in taxation is increasing the popularity of gold exchange-traded funds.
The last one year returns of gold of 20-22 per cent per annum has further pushed up investor interest in this product.  Gold in physical form has always been a household favourite. However, physical gold comes with high overhead costs (in form of wastage, making charges etc) of almost 30 per cent. Further, storage issues and the hesitance in selling gold in times of need, making it illiquid, are big drawbacks of physical gold.
Gold exchange traded funds (ETFs) provide high liquidity and are easy to transact in. Even though investors do not actually own the gold, Gold ETFs back their assets by buying actual physical gold of 99.5 per cent purity. Gold ETFs allow investors to invest smaller amounts thus enabling fractional ownership.
There are two ways to invest in gold funds – through the ETF or a gold fund. While Gold ETFs are traded on the stock exchange like equity ETF, old funds are like index funds and to be invested through the AMC.
Gold ETF allow real-time buying and selling whereas gold mutual fund (MF) operates on the NAV at the end of the day. Gold MFs are essentially fund of funds. Â Â The returns in gold MF and gold ETF are pretty similar when one accounts for demat brokerage costs. Hence the choice between gold MF and ETF is more about what is convenient to the investor. SIP can also be set up in gold MF.
Investors must keep in mind that returns on gold (invested in any form) are market linked. Hence any gold investment is subject to volatility. Though one would tend to notice it more in a financial investment, given that the current valuation is available on a real time basis. Â Â Taxation on financial gold investments has become more favourable post the recent budget. From April 1, 2025, the long term capital gains on sale of gold MF and ETF will be taxed at 12.5 per cent.
Further the holding period to qualify as long term would be 12 months for gold ETF and 24 months for gold MF. Â Â To evaluate a gold ETF, investors should compare the expense ratio, tracking error and difference and liquidity. The expense ratio of most of the gold ETF is 0.3-0.6 per cent p.a.
Expense ratio must be considered along with the tracking error and difference for the right assessment. Tracking difference measures the difference between the ETF performance and the index performance.
Tracking error is an indicator of how consistently close or wide an index ETF’s performance is relative to its benchmark.  It is desirable to have a low expense ratio and tracking error and difference. The data on tracking error is available in the AMC website as well as fund factsheets.
Gold ETFs are the best way to invest in gold – however investors must keep in mind to keep exposure to gold (in all forms) limited to 10-15 per cent of the overall portfolio.
Source: https://www.deccanherald.com/