When it comes to optimal asset allocation, gold as an asset class has an important role to play. In India, gold is one asset class, largely held in physical format. According to some estimates, India is home to 27,000 tonnes of physical gold. But today, given the rapid financialization, there is a gradual shift seen among the investors – from buying gold in the form of jewelry, coins, or bars to Gold ETFs for exposure to the yellow metal.
For the uninitiated, Gold ETFs (Exchange Traded Funds) are passive mutual funds that track the prices of physical gold. Here, every unit of Gold ETF is backed by physical gold and offers the benefits of owning gold sans the hassles of managing it in physical form. As the name suggests, Gold ETFs are listed and traded on stock exchanges, thus giving the convenience of buying and selling in electronic form.
To understand how Gold ETF stacks up in comparison to traditional formats of buying gold, let us consider the following aspects:
Purity – The biggest concern while investing in Gold in any physical form is about ensuring the purity of Gold. Since each unit of gold ETF is backed by a physical gold with a purity of 99% or more, one need not worry about the purity aspect.
Costs & Expenses – When buying physical gold, storage is a matter of concern. When opting for facilities like a locker, there is an additional element of cost attached to it.
Similarly, when buying physical gold, there are charges and several other costs attached to it. Investing in Gold ETFs reduces all these hurdles and makes it a more cost-efficient way of investing and owning gold. Since gold is held in demat form, there is no worry about theft.
Ease of Investing – Gold ETFs can be bought in multiple of one unit, which makes it far more affordable, unlike jewellery or coins/bars where one has to shell out a more significant sum. The units can be bought anytime during market hours when stock exchanges are open.
SIP Option: One can even plan to systematically take exposure to gold via SIP. Those without a Demat account can invest in the Gold Fund of Fund and initiate a SIP.
Transparency – One of the biggest advantages of Gold ETFs is the transparency in prices they offer. As gold prices fluctuate, the units of Gold ETFs listed on the exchange reflect the same. In this way, one can capture the ongoing prices, while buying Gold ETF units. This type of price transparency is not available with jewellery and bullion.
Similarly, when one wants to sell, one can capture the live gold prices, making it a win-win for the investor.
Tax Impact – Capital gains on Gold ETF units held for more than three years get classified as Long Term Capital Gains. Here, the tax rate is at 20% with an indexation benefit. If the holding period is less than three years, then short-term capital gain tax is applicable, which is the tax rate as per one’s tax slab.
As can be seen from the above aspects, taking exposure to the yellow metal via Gold ETFs is one the most optimal and cost-efficient approaches. Hence, investors looking to add to gold allocation in their portfolio can consider doing so with the help of Gold ETFs. At a time when uncertainty reigns given the geopolitical developments, multi-decadal high inflation in advanced economies, and quantitative tightening by global central banks, gold can act as a hedge against inflation and volatility in other asset classes. So, based on one’s asset allocation requirements, one can consider investing in Gold ETFs.
(Gurjeet Singh Kalra, Head – ETF Sales,
AMC)