Gold Exchange Traded Funds (ETF) are open-ended mutual fund schemes that closely track the price of physical gold. Each unit represents one gram of gold having 0. 995 purity, and the ETF is listed on stock exchanges. The net asset value of each unit is calculated based on the prices of physical gold prevailing on that day and is designed to provide returns that would closely track the returns from physical gold.
Gold ETFs have seen net outflows in March and in the first fortnight of April, with investors turning net sellers due to falling prices of gold in global markets. But analysts claim that despite the recent net outflows, ETFs will stage a comeback as they continue to be an attractive investment during high inflation and uncertainties in global economic growth.
According to C.R. Chandrasekar, Founder and CEO, fundsindia.com, an online mutual fund service provider, fresh inflows to ETFs might be an issue given the weakness in global prices. But investors currently investing through the Systematic Investment Plan would continue as they can potentially average their investments.
Chirag Mehta, Fund Manager (Commodities), Quantum Mutual Fund, says that investors with a long-term outlook would stay invested in this asset class. In the past two days, the trend has reversed and fund houses have started witnessing inflows. However, according to him ETF holdings had not declined alarmingly.
However, V.K. Vijayakumar, Investment Strategist, Geogit BNP Paribas Financial Services, says investors are likely to reduce their investments in ETFs. They would be influenced more by the present market opinion that gold is likely to remain sluggish for quite some time. But, if the price crashes to around $1,250 a troy ounce (approximately the present cost of production) in the international markets, there could be a big spurt in investment through ETFs, he says.
Going through the performance of Gold ETF schemes such as Birla Sun Life, SBI Gold, Religare and Kotak Gold, the returns for a three-year period ranges from 14.8 per cent to 15 per cent. For a one-year time frame, the returns are in the minus territory, between 10.3 per cent and 10.5 per cent.
e-Gold is another purchase option, involving investments in units traded on the National Spot Exchange (NSEL). Here, the investor is required to have a demat account with an affiliate of NSEL. e-Gold’s brokerage and transaction charges are lower than gold ETFs as there are no fund management charges. One can take delivery of gold or sell it in the exchange.
But there is also a negative point here from the tax angle, according to Mr. Chandrasekar of fundsindia.com. “Under e-Gold, one has to hold the yellow metal for 36 months to enjoy long-term capital gain benefits, and this is taxed at 20 per cent after indexation. For ETF and gold funds, the holding period to be classified as long-term is only one year. After a year, ETF and gold funds will suffer 10 per cent tax without indexation and 20 per cent after indexation,” he says.
For a small investor, gold ETF would appear to be the best option, as it meets his needs without difficulties in terms of creating a separate demat account, tax implications and wealth tax.