Gold ETF India – All that you Need to Know

 

What are Exchange Traded Funds

An ETF or Exchange Traded Fund is an investment fund that is mainly traded on a stock exchange, unlike regular mutual funds. These funds function mostly like stocks and are known to hold assets such as stocks, commodities, or bonds.

The concept of the true modern day gold ETF was developed in India in 2002 by the Benchmark Asset Management Company Pvt. Ltd. in a proposal made to the Securities Exchange Board of India (SEBI). This proposal was finally approved a few years later and the first Indian gold ETF was launched in 2007. Currently, India’s NSE alone lists over a dozen separate gold ETFs, which are traded daily and are managed by India’s leading Asset Management Companies.

Gold ETF Funds to Invest in India

As of now, there are 13 Gold Exchange Traded Funds available in India. Depending upon their AUM, the Gold ETFs available for investment in India are as follows-

Gold ETF	AUM (In Crore)	1 Year  Return (In %)	3 Year Returns (In %)	5 Year Returns (In %)
Nippon Gold ETF	2290.17	27.81	11.33	8.38
SBI Gold ETF	626.71	27.43	11.08	8.16
HDFC Gold Exchange Traded Fund	615.09	26.53	11.29	8.22
UTI Gold Exchange Traded Fund	422.02	26.99	11.25	8.33
Kotak Gold ETF	355.08	27.35	11.16	8.18
Axis Gold ETF	108.84	27.84	11.29	7.73
ICICI Prudential Gold ETF	101.47	27.23	10.87	8.02
Birla Sun Life Gold ETF	79.93	27.4	11.16	8.27
IDBI Gold Exchange Traded Fund	60.18	27.15	11.6	8.57
IDBI Gold ETF	60.18	27.15	11.6	8.57
Invesco India Gold Exchange Traded Fund	36.6	27.61	11.25	8.28
Canara Robeco Gold Exchange Traded Fund	35.84	19.28	6.91	7.15
Quantum Gold Fund	14.37	27.89	11.15	8.15

Data as on 23 March 2020; Source- Value Research

Features of Gold Exchange Traded Funds

Over the course of time, the demand and popularity of gold ETFs amongst investors has surged high. While Indians hold confidence in investments in the form of gold, owning it in the form of jewelry, gold coins or bars comes at a huge cost. As a replacement, owning it in the form of paper gold which is available at a price almost equal to the actual price of gold, fulfills the investment objectives equally.

• Similar to the trading of other equity stocks of companies, India allows the trading of gold ETFs on the National Stock Exchange along with other leading global stock exchanges. This implies that gold ETFs can be easily and continuously traded at the applicable market prices
• Gold ETFs are known so because of their investments to only one type of asset which is gold bullion
• As a result of their investment in physical gold which serves as the underlying asset, Gold ETFs are passive investments whose value is linked to the price of gold in global/local markets
• At present, Gold ETFs in India are available for investment by both individuals as well as institutional investors
• Gold ETFs can be purchased in paper or in dematerialized form. One Gold ETF is equivalent to 1 gram of gold backed by physical gold of high purity (99.5%)

Advantages of Gold Exchange Traded Funds

Buying gold ETFs simply implies buying gold in electronic form. You can buy and sell gold ETFs just as you trade in stocks. Such investments bring in a lot of advantages, especially for Indian investors. Given below are some of them-

• Gold Exchange Traded Funds provide investors with the flexibility of stock investments along with the simplicity of purchase associated with gold investments
• Investors have gradually moved towards gold ETFs since they offer the security of investment and allow the investors to track gold prices easily, while also eliminating the need of storage
• Because of its direct gold pricing, holdings in Gold ETFs are known to be completely transparent and trustworthy 
• Due to their unique structure and creation mechanism, gold ETFs are highly economical investment options when compared to physical gold investments since they do not involve making charges, storing costs or jeweler margin.
• The trading of Gold ETFs is tightly regulated by market watchdogs such as SEBI, which ensures that you get the best price for your investment such that there is no chance of the investors being mislead by fund houses
• Redeeming your funds by selling gold ETFs is a rather simple process because of the clear and transparent documentation process, unlike the selling of physical gold which is a lot trickier and unreliable
• Gold ETFs do not incur Exit Load, Entry Load, Wealth Tax, Security Transaction Tax, VAT or Sales Tax 

Who should Invest in Gold Exchange Traded Funds

• Gold ETFs are ideal investment options for investors willing to invest in gold but are stuck due to the storage hassles or are unsure of the purity of physical gold
• Investors who are willing to lock-in their funds for a longer period of time, at least 3-5 years should consider investing in Gold ETFs
• If you wish to bank on the increasing value of gold in the future, Gold ETFs should be your choice of investment
• If you are looking for gold investments without paying any additional costs such as making charges, etc., Gold ETFs or paper gold fulfill your objective of saving on those charges if your investment is substantial
• You can invest in Gold ETFs even if you do not wish to put in a large sum as they allow you to purchase as low as 1 unit which is equal of 1 gram of pure gold
• If you are looking for gold investments without paying any additional costs such as making charges, etc., Gold ETFs or paper gold fulfill your objective of saving on those charges if your investment is substantial

Things to be Considered before Investing

As you decide to invest in Gold Exchange Traded Funds, here are a few things that you must keep a check on-

• While investing in ETFs, it is important to track the historical performance of the fund house. It is advised that you go through the past performance of at least 3 years of the fund house before investing in any Gold ETF
• Gold ETFs must be chosen based on their trading activity. Most of the funds listed on stock exchange trade heavily based on the changes in their benchmark, implying their liquidity. Higher the trading activity, higher will be the liquidity
• You may go through the Assets Under Management (AUM) of a company as it denotes the market value of the assets that it manages for its investors. Higher the AUM, higher will be the number of portfolios or clients that it handles implying the reliability of the fund house
• When deciding which ETF to invest in, NAV (Net Asset Value) plays a major role as it can be referred to the ETF’s per share value. You must also check the NAV of the Gold ETF you are planning to invest in
• Exchange Traded Funds are known to track the underlying index closely; however, a few of the funds do not do it properly. It is, therefore, suggested that investors properly check the tracking error of the ETF. Investors must choose the ETF with the minimum tracking error
• ETFs do not have any lock-in period; however, the trading must be done only during the trading hours, which is 9:15 AM to 3:30PM. Hence, partial withdrawals or early exits of these funds must be avoided

Taxation

For taxation purposes, Gold Exchange Traded Funds are considered to be non-equity investments; hence, taxation rules similar to debt funds apply to such investments. Short-term investments in gold ETFs occur if gold ETF investments are held for 3 years or less from the date of initial allotment, in which case, short term capital gains taxation rules will apply. Investments made in gold ETFs for periods exceeding 3 years from the date of allotment are considered to be long term investments; hence, will be subject to long term capital gains taxation rules.

For example –

If an investor has made a capital gain of ₹50,000 on investment in a debt mutual fund and withdraws the amount before 3 years of investment, Short Term Capital Gains Tax would be levied, as per the income tax slab of the investor. ₹50,000 would be added to the taxable income of the investor and taxed accordingly.

If an investor withdraws the investment including capital gains post 3 years of investment, 20% Long Term Capital Gains Tax of 20% is levied, with the benefit of indexation.

Indexation reduces the value of overall Long Term Capital gains to reflect the effect of inflation on your investment.

To calculate the final value of capital gains post indexation, we use government’s Cost Inflation Index (CII) in the following formula:

Indexed cost of Acquisition = Investment Amount * (CII of the year of withdrawal/ CII of the year of investment)

Suppose the investment amount is ₹70,000 in the year 2016 and the withdrawal  amount is ₹1 Lakh. The value of capital gains is ₹30,000 before indexation

Indexed Cost of Acquisition= 70,000* (280/254) = 77165.35

Note: CII in the year 2015 = 254

CII in the year 2018 = 280

Final Value of Capital Gains= 100000- 77165.35 = 22834.65

Tax Payable = 20% of 22834.65 = 4566.93

How to Invest in Gold Exchange Traded Funds

In order to be able to invest in Gold ETFs, one must have a Demat Account. The following documents must be furnished to open an account-

• PAN Card
• Address Proof (Adhaar card, etd.)
• Identity Proof (Voter ID, etc.)

Once your account has been opened, you can decide which Gold ETF you wish to invest in and place an order. Post this, you will receive a confirmation of your purchase on the registered email id. It must be noted that on buying or selling the ETF, a small fee will be charged by the fund house or the broker (if any).

Additionally, if you wish to invest in Gold funds (not ETF) through a hassle-free process, you may do so by visiting online portals such as Paisabazaar.com. These Gold funds can  have further investment into gold ETFs or a few may also hold gold mining stocks.

Frequently Asked Questions

Ques. Why are gold ETF prices different?

Ans. The difference in prices of gold ETFs implies the difference in their NAVs. This could be due to the following reasons-

• Gold ETFs are actively traded and hence, are prone to market volatility
• The selling of gold holdings and buying of debt holdings involves certain expenses which bring out a change in the NAV. Higher the NAV, lower will be the expenses involved
• Gold ETFs invest upto 95% to 99% of their assets in gold bars and related instruments and upto 5% of the assets are invested in debt and money market instruments, leading to changes in the NAVs of different ETFs

Ques. Which is better out of a gold ETF or gold fund?

Ans. Gold ETFs invest directly in physical gold that have 99.5% purity while Gold Funds are open-ended funds that invest in Gold ETFs and gold producing companies. Both these investments offer almost equal returns. Additionally, both of them involve different expenses such as opening a Demat Account in Gold ETF while paying a high exit load in Gold Fund. However, if you wish to invest through the SIP mode, you can only invest in Gold funds and not Gold ETFs.

Ques. Do gold ETFs pay dividends?

Ans. Gold ETFs invest 95%-99% of their assets in physical gold and the remaining 5% in debt securities and related instruments, whereas Gold funds invest in stocks of the companies that are engaged in the gold industry. Hence, Gold funds provide dividends while Gold ETFs don’t.

Ques. What are the disadvantages of ETFs?

Ans. Investors must have a Demat account in order to invest in ETFs and these investments do not offer the SIP mode of investing. Additionally, there is comparatively low liquidity in case of ETFs.

Ques. Are ETFs safer than stocks?

Ans. Yes, ETFs are considered safer than stocks and also involve smaller fees than the other actively traded investment options.

Ques. How long should you hold a leveraged ETF?

Ans. Leveraged ETFs are certainly not meant for the long term since these funds have been ideally designed for the investors who wish to play on an index or sector for a very short term (maybe, daily). If invested otherwise, these funds may cost the investors a huge fee, rebalancing and compounding losses.