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Gold ETFs adds variety to your portfolio

, November 8, 2012, 0 Comments


Gold ETFs (Exchange Traded Funds) provide a smarter way of purchasing gold in electronic form just like you buy shares of a company. They aim to track closely the price of physical gold and provide corresponding returns to the investors.
Each Gold ETF unit is equal to the price of 1 gm of gold. You can buy even one unit (i.e. one gram) at a time and build up your gold portfolio to your desired level over time.


Why Invest in Gold?

Gold has always proved to be a good investment. It is recommended as a must-have in any investor’s portfolio because of its ability to add robustness on account of countering the effects of inflation and exchange rate fluctuations.

Historically gold prices have shown better stability even during periods of crises as compared to other asset classes. In high inflationary periods, gold has provided insurance protection to the portfolio and prevented value erosion.

The chart below shows the rolling returns of gold over 1 year, 5 year and 10 years at 30.3%, 20.2% and 18.5% respectively.

The significant point to note here is except for 10 years rolling returns gold at some point of time has given negative returns which justifies the rationale for long-term investment period.

 

Benefits of Gold ETFs

  • Lower Ticket Size – Since Gold ETF can be purchased in small quantities, they provide an opportunity to accumulate gold over time for future requirements like children’s marriage.
  • Liquidity – Gold ETF units can be traded during market hours just like shares providing liquidity advantage.
  • Marketability – You can trade any amount in Gold ETFs, including short selling and buying on margin.
  • Safety – Since the gold is kept in demat form, you need not worry about its safety.
  • Cost Efficient – Owning gold ETF is cheaper than owning physical gold because of absence of making charges, premium and carrying cost (i.e. cost of storing physical gold).
  • Tax Advantage – Gold ETFs provide a tax efficient way of holding gold. You enjoy benefit on long-term capital gains and pay no Sales Tax, Securities Transaction Tax, VAT or Wealth Tax.
  • Transparent Pricing – The prices are transparent and Gold ETF units can be purchased at real time prices. You can also track the investment value of your portfolio in real time.
  • Trusted – Gold ETFs provide the added advantage of purity with no issues of wastage or impurities like in case of physical gold.
  • Loan Facility – Gold ETF units are accepted as collaterals for loans.

Disadvantages

  • Brokerage – A small cost is involved during buying and selling of Gold ETFs in the form of brokerage.
  • Fee – Another related expense is the asset management fee charged by the fund house which reduces the returns slightly as compared to the actual increase in gold price. 
  • Liquidity – Some ETFs are illiquid making the buying and selling inflexible. Investors should ignore such illiquid ETFs.

How to Buy
All you need to buy a Gold ETF is a normal demat account. If you have one for investing in shares, the same can be used.

Gold ETFs in India
There are 14 Gold ETFs in India with total AUMs of approximately Rs. 10,000 crore forming about 2 per cent of the total industry AUM. The best Gold ETF is Goldman Sachs Gold BeES followed by Kotak Gold ETF, Reliance Gold ETF and SBI Gold ETF.

How to select best Gold ETFs
The following criteria can be used to judge a Gold ETFs before investing:

  • Lower Expense Ratio – The expense ratio of various Gold ETFs vary from 1% to 2.5%. Goldman Sachs Gold BeES and SBI Gold have the minimum expense ratios at 1% and 1.3% respectively.
  • High AUM – A consistent higher AUM not only represents investor’s confidence, but also reduces the expense ratio of the fund.  Goldman Sachs Gold BeES has the highest AUM in the category.
  • High Trading Volume – Higher the trading volume, better will be the liquidity of the Gold ETF. Goldman Sachs BeES is again the most actively traded fund followed by Kotak Gold ETF and Reliance Gold ETF.

Current Scenario
Gold ETF’s have become less lucrative with gold prices crossing Rs. 30,000 per 10 gram level. Being a price elastic product, investors do profit booking when prices go up sharply.

In current market conditions, limited returns can be expected from Gold ETFs and Equities may perform better than ETFs over the next few months. Also, last year gold was quoting USD 1920 per ounce which has now gone down to around USD 1650 per ounce.

But the same correction was not witnessed in domestic market mainly because of Rupee effect. Once rupee starts strengthening against dollar, domestic gold prices are expected to moderate.






About author
Dr Naveen J Sirohi is a Ph.D. in Commerce from CCS University and a Certified Financial Planner. Currently he is Assistant Professor (Finance) in the Department of Management at BCIPS, New Delhi. He has more than 10 year of experience including HDFC Bank and Corporation Bank. His domain expertise include Personal Finance, Financial Management, Risk Analysis & Insurance Planning, Retirement Planning, Taxation, Security Analysis & Portfolio Management and Financial Statement Analysis. Dr. Naveen also runs a Consultancy firm, PRUDENT ADVICE, providing Financial Planning services assisting clients achieve financial freedom. ...more