Insights

Go for gold ETFs this festive season

November 4, 2012 . Vidya Bala

Its Diwali season again and you may be looking to add to your prosperity by buying in to the auspicious yellow metal – gold. Or you may choose the occasion to kick start the wealth building process for your child’s future. Whichever way, why not do it a little differently this time? If you are buying gold, consider buying them in electronic form instead of its physical form, through gold ETFs and gold fund of funds.

Here’s how holding gold in e-form may be a superior investment option for you:

Convenience

Gold ETFs can be bought easily as they are traded in the stock exchanges. As one unit of ETF represents a gram of gold, you can buy small quantities with purity assured at 99.5 per cent. As you do not have the gold in physical form with you, you need not worry about its security or the cost incurred in safe guarding it in lockers. Also, its price does not vary from state to state; as is the case with physical gold. Gold ETFs are also accepted as collateral for loans.

Tax benefits

Gold ETFs do not suffer value added tax (VAT) or wealth tax. Also, any sale after one year is treated as a long-term capital gain  and indexation benefits can be claimed. 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) and a fund management fee of about 1 per cent (lower for gold funds of funds).

Reliance My Gold Plan – Get 6% Extra Gold

Transaction and costs

Unlike physical gold, where you incur making charges or wastage charges when you buy or sell them, gold ETFs can be sold at transparent price in the market.

If you held gold coins or bars, your jeweler will mostly allow only an exchange offer and not pay you cash. ETFs enable you to exchange your units for cash.

Even if you wish to accumulate gold over a period for a future goal, ETFs come in handy. Let us suppose you wish  to buy gold  for your daughter’s wedding. If you sell the jewellery accumulated over the years and buy new trendy ones that your daughter would prefer, much of the value would be lost in wastage and so on. But if you sell ETFs that you had accumulated, you would broadly get the market value of gold in cash, enabling you to buy the jewels. If you are a High net worth individual and hold at least a kilogram equivalent of gold ETFs, then  you may well exchange it with the AMC for physical gold if you wish to.

How to buy

If you have a demat account and wish to make lump sum purchase of gold ETFs then you can buy them through your broker. But you cannot run SIPs in gold ETFs through most trading platforms or through the funds house offerng the ETF (FundsIndia, though, offers this SIP feature to investors in its equity platform). Also ensure that there is enough liquidity in the ETF that you buy. Goldman Sachs Gold ETF, Kotak Gold ETF and Quantum Gold have reasonable liquidity.

If you do not have a demat account or wish to buy small quantities over long periods then gold funds of funds will fit your need. Funds such as Reliance Gold Savings, HDFC Gold, Quantum Gold Savings and Kotak Gold offer gold mutual fund schemes. They invest your money in gold ETFs.

Besides, single investment option, these fund of funds also have SIP options and allow you to buy small amounts over longer periods, on an auto pilot mode, by direct debit to your bank account.

Start the season with electronic gold!

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