Gold prices have been steadily rising amid the coronavirus scare. This week while international prices touched seven-year high, gold rates in India zoomed past Rs 43,000 per 10 grams for the first time ever.
Stock markets have turned volatile over concerns of a slowdown in global economic activity, making investors seek refuge in the safe-haven metal.
Spot gold is close to $1,650 an ounce and Goldman Sachs Group Inc in its recent note said that the price could climb further to $1,700/ounce in three months and $1,800 in 12 months. Analysts at Citi have forecasted gold to top $2,000 an ounce in the next 12 to 24 months.
In addition to coronavirus, depressed real rates and focus on the upcoming US presidential elections have also driven demand for the metal as a haven.
Whether or not the metal's price continues to climb, it is wise to have gold as a part of your complete investment portfolio to balance the market risks.
If you are looking to take advantage of this rally, Gold ETFs are a good alternative to physical gold and have been especially gaining popularity in the last few weeks. In January, inflows into gold ETFs in India touched a 7-year high. At a global scale, holdings in bullion-backed ETFs have risen for 22 consecutive sessions last week, the longest-ever run, according to data compiled by Bloomberg.
What are Gold ETFs?
Gold ETFs (exchange-traded funds) are like mutual funds as they derive their value for an underlying asset (gold in this case) but in contrast, these instruments can be bought and sold at live markets from stock exchanges.
Their valuation is based on the gold price, allowing you a way to own gold in virtual form. To put it plainly, if you were to invest in one unit of gold ETF, you will be investing in one gram of high-quality gold in demat form.
- You do not have to worry about storage or purity of the metal.
- It is a liquid instrument. You can sell or buy an ETF from the stock exchange during trading hours (9:15 am to 3:30 pm) at a price that suits you.
- It is simple to understand. The movement of its price will be the same as gold price. There is no company, government or interest-earning appeal that dictates the prices of the precious metal. This ensures transparency.
- There is no lock-in period.
- You can purchase as little as one unit.
- No entry or exit load.
- Compared to making charges, jewellers' margin and other associated costs that come with physical gold, expenses associated with ETF are lower.
How to Invest in Gold ETFs?
You need to have a demat and trading account. Buying gold ETF is same as buying a company's equity share from the stock exchange. Pick a gold ETF listed on NSE or BSE and purchase it at market price. You will have to pick number of units like you would pick number of shares and place the buy order.
The units will be credited to your demat account in T+2 days.
Apart from lumpsum, asset management companies also allow you to invest in their ETFs through systematic investment plans (SIP).
How to pick a gold ETF?
Gold ETFs have been trading on Indian stock exchanges for around 13 years. There are a little over 10 gold ETFs listed on NSE and BSE. Here are some of the popular ETF choices in India:
|ETF name||Fund size (Rs crore)||6-month returns (%)||1-year returns (%)||3-year returns (%)||5 -year returns (%)|
|Aditya Birla Sun Life Gold ETF||105.03||10.25||28.42||41.44||52.25|
|SBI Gold ETF||866.34||9.25||27.7||40.26||50.58|
|Axis Gold ETF||145.95||9.45||28.09||39.97||47.42|
|UTI Gold ETF||486.58||9.3||27.34||41.03||51.56|
|HDFC Gold ETF||669.47||8.91||26.82||41.06||50.99|
|Kotak Gold ETF||649.11||9.41||27.6||40.56||50.7|
Note: The returns shown here are absolute and in no particular order. The returns are as on 26 February 2020 for all funds except Aditya Birla Sun Life Gold ETF (data as on 25 February 2020).
You can notice that the results are similar and will trade in the same range as these are open-ended ETFs that passively track the performance gold bullion.
These are passively managed by the asset management company to minimize the return differential between the fund and the underlying index (bullion).
The objective of these funds is to closely track the performance and yield of gold and this information could differ if there is a tracking error.
While making a decision, pick a fund that has low tracking errors and higher trading volumes.
Gold ETFs should be looked at as an investment to diversify one's portfolio and put not more than 10 percent of the total investment in this form. These are ideal if you are looking for gold or mutual fund investment options that allow you to transact during trading hours. Ideally, a long-term horizon will fetch good returns.
Note that there chargest of expense ratio and broker costs associated with the purchase and sale of gold ETFs.
Further, gains from investments in gold ETFs are treated as gains from non-equity instruments for tax purposes. This means that when held for less than 36 months, these will be considered as short-term investments and taxed as per your income tax slab. If held for over 36 months, gains will be taxed at 20 percent after providing for indexation.
The article is not a solicitation to buy, sell in securities mentioned in the article. Greynium Information Technologies Pvt Ltd, its subsidiaries, associates and the author do not accept culpability for losses and/or damages arising based on information in this article.
About the author
Olga Robert has been covering equity markets and personal finance for over two years.