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ETFs give investors a way to own Gold without holding it in the physical form
The traditional way of investing in gold is buying physical gold — coins, biscuits and bricks. However, this form of buying gold for investing comes with several disadvantages, like doubts about the purity, security, the high cost of storage, etc. This, combined with the popularity of gold as an investment product over the past few years when its price was skyrocketing, gave rise to financial innovations about how one can invest in the yellow metal.
Gold exchange-traded funds (ETFs) and fold fund of funds (FoFs) are some of those that came into existence in the last decade or so, finding their way into the investment space through the mutual fund industry in India. While gold ETF is the more popular route to invest in the precious metal in the country, gold FoFs too have gained currency among investors. Through innovative financial engineering, ETFs combine the popularity of buying the yellow metal without holding it in physical form, have lower tax rates, give leeway to trade on the bourses, and also the freedom to realise nearly the full value of the metal.
However, investors are often faced with the choice of either investing through the ETF route or going through an FoF.
Gold ETFs
There are several advantages of investing in gold through the ETF route over the FoF route and physical gold: The option to buy gold in small quantities, a guarantee of quality and purity, being nearly risk-free in terms of holding ETF units, a tax advantage over buying physical gold, realisation of full value of the gold while disposing off the units, etc, top investors' minds (Gold ETFs: A better bet).
Of these, the taxation advantage is one of those advantages that are not known to many, financial advisers and planners say. If you invest in gold ETFs, hold it for more than a year and make some profit, you will be liable to pay a capital gains tax of 10%.
On the other hand, if you buy gold coins, bars, etc, and profit from its rising prices, you need to hold the asset for more than three years to qualify for the 10% capital gains tax.
Also, in ETFs and FoFs, you don't need to pay wealth tax while, under some conditions, you may face some wealth tax if you have invested in physical gold. In the case of ETFs and FoFs, value added tax (VAT) is not levied, but this has to be paid in case you buy the yellow metal in the physical form.
New avenues for wealth creation
Of late, some fund houses have also launched wealth-builder funds that combine equity, debt and gold investments in one single scheme. In some funds, to gain the tax advantage, the scheme invests at least 65% in equities, while the fund managers have the advantage of investing between 0% and 35% of the corpus in debt and gold. So here, even if you have made good gains in gold and create wealth over the long term, you are exempt from paying any tax.
Advantages of gold exchange-traded funds
Affordability: Ideal for retail investors as they can buy gold in small quantities
Purity: The purity of gold held by fund houses is guaranteed, usually at 99.5%.
No risk of theft: Issued in demat form and, hence, far safer than holding physical gold Liquidity: Bought and sold like any other stock on bourses
Transparency: Prices quoted on bourses in real time Low holding cost: Buying, holding and selling costs for ETFs are lower than physical gold. Also, there are no locker charges for ETFs.
Tax benefits
a) Long-term capital gains tax of 10% in case ETFs are held for over a year, compared to three-year requirement in case of gold coins, bars, etc b) No wealth tax, VAT c) No securities transactions tax
Big-buyer advantages: HNIs buying a large number of gold ETF units can redeem & take delivery of physical gold instead of money. Some fund houses also allow small quantities' delivery
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