With jewelers and banks once again opening up their gold coin sales counter (after they had reduced sales to help curb gold imports), you may be tempted to buy a piece of the yellow metal on the auspicious occasion of Dhanteras.
Else, you may be enthralled with the gold scheme now offered by many jewelers, which may well come with a tag of risk unknown to most (please be aware that these gold schemes do not come directly under the purview of any regulator).
But why not go for cheaper, safer, tax efficient and non-physical option if you intend to make this as an investment? Yes, we are talking of gold Exchange traded funds (ETFs) and gold fund-of funds (gold funds) offered by mutual funds.
Gold funds have significant advantage over physical gold if you are looking at it as an asset class. Here’s what makes gold funds a superior option.
Liquidity and cost
Physical gold, especially in the form of jewellery, entails high wastage and making charges, as much as 20%, and is also low on purity, usually 91.67% (22 karat) or less.
Also, often times, jewellery especially when studded with precious stones, is charged for the price of 24 karat, even if the purity is lower.
However, when it comes to selling the same jewellery, customers cannot sell it for the ‘high purity’ rates. Purity issues eat up into the gold price. Also most jewelers only allow only exchange of jewellery and won’t pay cash.
Gold ETFs can be bought and sold easily as they are traded in the stock exchanges at the prevailing market price. They can also be bought without a demat account (gold ETFs require demat) using gold fund of funds. Both gold ETFs and gold fund of funds are highly liquid and can be bought and sold anytime.
As one unit of ETF represents a gram of gold, you can buy small quantities with purity assured at 99.5 per cent. Fund houses allow you to invest as low as Rs 500 through a systematic investment plan in gold funds.
Besides the brokerage charges (for ETFs) and a nominal expense ratio, gold bought through the fund route do not suffer from exorbitant direct and hidden charges, like physical gold.
Lower tax with gold funds
Gold ETFs do not suffer value added tax (VAT) or wealth tax while all forms of physical gold do. Also, any sale after one year is treated as a long-term capital gain and indexation benefits can be claimed for gold ETFs and gold fund of funds.
In any form of physical gold, only a three-year holding would qualify for long-term capital gain benefits.
More importantly, unlike other transactions in the stock exchanges, gold ETFs do not suffer securities transaction tax (STT) as they are classified as mutual funds. You incur only brokerage charges (lower than trading in equities) besides a nominal expense ratio.
What to go for?
Among gold ETFs, look for those with high liquidity. Currently, ETFs from Goldman Sachs (Gold BEES), SBI, Kotak and Reliance enjoy high liquidity.
Among funds, Kotak Gold fund, Reliance Gold Savings, Birla Sun Life Gold and Quantum Gold Savings have delivered superior returns.
To read more about gold funds’ performance, see our post on ‘How have your gold funds fared?‘
Gain from the advantages of gold funds by investing in them as part of your asset allocation, this festive season. Happy Diwali!
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I invested in Reliance Gold Fund thinking that at least it would not be volatile in this current market as other equity MFs. But to my surprise, I saw returns of around 11% to -3%. It is better idea to invest in ETFs rather than FoF. Just a demat is required, but it would cost less in terms of charges.
Is there any other advantage of FoF, except that it can be purchased without a demat?
hello Abhishek, yes, gold can also be volatile. Pl do not compare NAV returns of ETFs (as given in websites like valueresearch) to gold funds. ETF returns should be based on their market price, taken from stock exchange. Currently, the difference between ETF and fund of fund is marginal. There is no other advtg of FOf except that it can be bought without demat and can be bought using SIPs (not all brokerages offer SIPs in gold ETFs). thanks.
Could you please also provide your views on Gold Investment via BullionIndia USP and Reliance My Gold plan?
Hello Amit, Bullion India or Reliance My gold plan are more suitable only if you want physical delivery of gold. Of course you can also sell the gold in your trading account through Bullion India but it will be treated as long-term capital gain only after 3 years (1 year for gold fund and etfs). Also in Reliance My gold plan, once you receive physical delivery, then the usual issues of storage, wealth tax and capital gain benefit only after 3 years will apply. And if you exchange them for jewellery quite a bit will be lost in making and wastage charges etc. Thanks.
a recommendation for consideration to all those are interested in the wealth creation
Thanks Vidya. Appreciate your reply.
Madam,
What would be difference of rate of return between Reliance Gold ETF and Reliance Gold Savings Fund for a period of 5 years? I am asking this question because Reliance Gold Savings Fund further invests the corpus in Reliance Gold ETF.
hello sir,
the fund of fund does not have a 5-year record (none of the fund of funds have, because they were launched much after ETFs) to do the comparison. But the diff. if at all is negligible and right now the returns of Reliance Gold Savings is slightly higher than Reliance Gold ETF (as a result of pricing diff. of a day between the 2). tks.
Hi Vidya,
Please give your views about NSE e-gold. If you can give a small comparison of e-gold and Gold ETF, it would be great.
Hello Romit, I suppose you must gave meant NSEL (national Spot exchange) e-gold. As even the e-contract series are under audit too, after the commodity contract saga, it is best to stay away and go for transparent options like ETF. e-gold is treated liek physical gold for all tax purposes. thanks.
Hi Vidya, I happened to buy UTI Gold ETF(through SEP) before I came across this article. Could you please let me know how is it performance so that I can decide whether to continue the SEP.
Hello Aparna, you can hold the ETF but can resort to one of the others we mentioned in the article for future SIPs. We mentioned those with high volumes and slightly higher returns. Returns may vary a bit as a result of both cash holding, expense and demand supply of ETFs. thanks, Vidya
I invested in Reliance Gold Fund thinking that at least it would not be volatile in this current market as other equity MFs. But to my surprise, I saw returns of around 11% to -3%. It is better idea to invest in ETFs rather than FoF. Just a demat is required, but it would cost less in terms of charges.
Is there any other advantage of FoF, except that it can be purchased without a demat?
hello Abhishek, yes, gold can also be volatile. Pl do not compare NAV returns of ETFs (as given in websites like valueresearch) to gold funds. ETF returns should be based on their market price, taken from stock exchange. Currently, the difference between ETF and fund of fund is marginal. There is no other advtg of FOf except that it can be bought without demat and can be bought using SIPs (not all brokerages offer SIPs in gold ETFs). thanks.
Could you please also provide your views on Gold Investment via BullionIndia USP and Reliance My Gold plan?
Hello Amit, Bullion India or Reliance My gold plan are more suitable only if you want physical delivery of gold. Of course you can also sell the gold in your trading account through Bullion India but it will be treated as long-term capital gain only after 3 years (1 year for gold fund and etfs). Also in Reliance My gold plan, once you receive physical delivery, then the usual issues of storage, wealth tax and capital gain benefit only after 3 years will apply. And if you exchange them for jewellery quite a bit will be lost in making and wastage charges etc. Thanks.
Thanks Vidya. Appreciate your reply.
Hi Vidya,
Please give your views about NSE e-gold. If you can give a small comparison of e-gold and Gold ETF, it would be great.
Hello Romit, I suppose you must gave meant NSEL (national Spot exchange) e-gold. As even the e-contract series are under audit too, after the commodity contract saga, it is best to stay away and go for transparent options like ETF. e-gold is treated liek physical gold for all tax purposes. thanks.
a recommendation for consideration to all those are interested in the wealth creation
Madam,
What would be difference of rate of return between Reliance Gold ETF and Reliance Gold Savings Fund for a period of 5 years? I am asking this question because Reliance Gold Savings Fund further invests the corpus in Reliance Gold ETF.
hello sir,
the fund of fund does not have a 5-year record (none of the fund of funds have, because they were launched much after ETFs) to do the comparison. But the diff. if at all is negligible and right now the returns of Reliance Gold Savings is slightly higher than Reliance Gold ETF (as a result of pricing diff. of a day between the 2). tks.
Hi Vidya, I happened to buy UTI Gold ETF(through SEP) before I came across this article. Could you please let me know how is it performance so that I can decide whether to continue the SEP.
Hello Aparna, you can hold the ETF but can resort to one of the others we mentioned in the article for future SIPs. We mentioned those with high volumes and slightly higher returns. Returns may vary a bit as a result of both cash holding, expense and demand supply of ETFs. thanks, Vidya