Taking succour in gold is a tried and tested way in crisis
Source: Tavaga Research
In times of an economic crisis, people fall back on gold as a trusted asset class, despite its staid returns. But it seemed for a while, as the novel coronavirus started to spread worldwide, that even the yellow metal had lost its lustre amid this doomsday.
But the safety in gold is hard to ignore over time and investors are back to reallocating their money in the asset class, away from more volatile investments like equities. And, it does not mean buying physical gold but investing in gold investment products like gold exchange-traded funds (ETFs) as well.
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According to AMFI (The Association of Mutual Funds in India), investors have infused more than Rs 1,600 crore in gold ETFs in the FY 2019-20. When the equity markets were doing well, investors, in contrast, had been pulling out money from gold ETFs in the last six financial years in favour of equity investments.
In the financial year FY 2018-19, investors had withdrawn Rs 412 crore from 14 gold-linked ETFs, says AMFI.
Given the threat posed by the Covid-19 pandemic, the gold asset class may continue to fare well as there is always a flight to safety in such situations.
Best gold ETF to invest in 2020
We list the gold ETFs in India, sorted according to decreasing one-year returns.
The difference in returns between the gold ETFs are low due to the fact that they track the price of the same physical gold. The small differences are due to tracking error .
Is the gold rally here to stay?
Global gold ETFs have added an equivalent of 298 tonnes of gold in the fourth quarter of FY20, says the quarterly report of the World Gold Council’s (WGC), which is the market development organization for the gold industry.
This is the highest tonnage addition since 2016. In dollar value, the addition was around $23 billion, the highest-ever quarterly addition.
Amid the Covid-19-triggered volatility in the markets, the gold rally is here to stay. The gold prices are on the rise:-
What is a gold ETF?
A gold ETF or exchange-traded fund is an ETF that is traded in the stock exchange and tracks the price of physical gold. The fund invests only in one asset i.e. gold.
The rationale behind investing in Gold ETF
The rationale behind investing in gold ETF is to partake in the benefits of the asset class, reflecting the value of physical gold, without the attendant stress of safeguarding physical gold.
Asset diversification with gold ETFs
Gold as an asset class historically has had a negative correlation with equity stocks — they perform at odds with each other. Hence, adding gold to our portfolio helps in diversification by reducing the risk in the portfolio. Gold as an asset class acts as insurance in a slowdown.
Advantages of investing in a gold ETF?
Here are some of the advantages of investing in Gold ETFs:-
Low transaction cost
Since gold ETFs are traded on the stock exchange, there is no entry or exit load, the only cost which the investor needs to bear is the brokerage cost which can vary from 0.5 to 1 percent, or can even be zero if we use a discount broker. We also save on the custodian cost which we incur when buying physical gold bars instead of gold ETF.
Trading in a gold ETF is relatively easier than trading in physical gold. Buying and selling of gold ETF units can be done on the platform of the broker, unlike physical gold where there is a fear of theft. Also buying gold ETFs help us save on expenses like storage cost and making charges.
There is no security transaction tax (STT) or wealth tax applicable to the income from the sale of gold ETFs.
Gains from the sale of a gold ETF are taxed similarly to that of physical gold. Short term capital gains (STCG) are applied if the holding period is less than 36 months and long term capital gains(LTCG) is applied if the holding period is more than 36 months. STCG is added to our income and is taxed according to our applicable tax slab, whereas for LTCG the applicable tax rate is 20 percent, after providing the indexation benefits.
Gold investment is generally considered one of the safest forms of investment as the prices of gold don’t fluctuate much. During an economic slowdown, gold is the asset class which helps our portfolio by giving superior returns.
Disadvantages of investing in a Gold ETF?
Some of the disadvantages of investing in gold ETFs include –
Redemption in cash only
When it comes to gold ETFs, we may only redeem it in cash and not in gold form.
There are cases where capital gain tax breaks that are applicable to traditional ETFs do not apply to gold ETF.
Demat account cost and annual maintenance charges by the broker
While investment in gold ETFs involves low costs, the charges by the broker such as on demat account opening and for annual maintenance can be a burden on our pockets.
Before we invest in a gold ETF, it is important for us to check the performance of the ETF.
How do we buy a gold ETF?
Investing in a gold ETF is fairly easy as it requires us to have a demat account, which can be opened with a broker. Once the demat account is active, an investor can start trading in an ETF just like an equity stock .
Following are the documents required to open a trading and demat account:-
- Identity proof (Aadhar card, driving license, voter registration, or passport)
- PAN card
- Address proof (Aadhar card, driving license, voter registration, or passport)
- Income proof
We should check the liquidity of the counter before placing an order to buy a gold ETF, as gold ETFs provided by some of the AMCs have a low trading volume. We should avoid such ETFs and place orders on the counters where there is ample liquidity.