Gold exchange-traded funds (ETFs) are back in the limelight. After a dull three-month period, a sudden slump in the US stock market last week has investors flocking to buy gold. In the past one week alone, gold prices have increased nearly 15 per cent in the international market.
As a result, investors, who invested in gold ETFs in the first half of this year, have reaped benefits. In the past one year, the average returns have been a stunning 31.42 per cent. In the last month alone, returns have been an impressive 13 per cent. The Bombay Stock Exchange’s Sensex, on the other hand, fell 3.45 per cent in the same period. Returns from equity diversified funds dropped by 4.72 per cent.
Gold ETFs track the spot price of gold and are listed on stock exchanges. Benchmark Mutual Fund launched the first gold ETF. At present, there are five players in the market, namely, Benchmark, Kotak, Quantum, Reliance and UTI.
Market experts, however, feel those who have missed the bus in the earlier part of the year will do well to wait till the festival season in India gets over. “Gold ETFs have reached attractive valuations, but prices may fall as we expect the dollar to strengthen further,” said Sriram Venkatasubramanian, head, FCH Centrum Wealth Management.
According to Nipun Mehta, the executive director and head of Societe Generale Private Banking, gold ETFs should be a part of any portfolio as it gives stability as a hedge against inflation and is usually seen to be inversely correlated with other asset classes such as stocks, fixed-income securities and commodities. The sudden price rise is a just a temporary phenomenon, Mehta says.
The ideal route for the investor, who wants to invest in gold with a long-term view (three years or more), the person needs to follow the systematic investment plan (SIP) through gold ETFs.
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Investing in gold ETFs will give the investor all the advantages of investing in gold while eliminating drawbacks of physical gold such as cost of storage, liquidity and purity. SIP investment enables the investor to accumulate units over time and average out the value of purchase through highs and lows. The units of gold ETFs can be redeemed either from the fund directly or from the market.
As far as the asset allocation goes, they should form only 5 per cent of the entire portfolio. “Gold ETFs should form a smaller part of the portfolio. Ideally, it should not exceed 10 per cent of the entire investments,” added Venkatasubramanian.
There are a large number of tax advantages in investing through ETFs vis-a-vis holding physical gold. For instance, if an investor holds gold ETF units for more than a year, he qualifies for the long-term capital gains tax at 10 per cent (without indexation) and 20 per cent (with indexation). In case, the investor sells within a year, the transaction will attract the short-term capital gains tax, depending on the person’s income bracket.
On the other hand, investors have to hold physical gold for three years to qualify for the long-term capital gains tax. For less than three years, the short-term capital gains tax is charged at 30 per cent.
Also, if the value of gold, along with other assets, is more than Rs 15 lakh, it attracts the wealth tax, “The wealth tax is levied at 1 per cent on the amount of over Rs 15 lakh. But gold held in the paper form does not attract wealth tax,” said Vikas Vasal, executive director, KPMG.