Gold ETF's in the current scenario

Gold ETFs averaged a return of 12.7 per cent when the equity market was plunging over much of the past year. The bellwether indices BSE Sensex and CNX Nifty lost close to 32 per cent over a one-year period.

Gold as an asset class acts as a hedge in a highly inflationary period and turns in superior returns when other assets are in distress.

The correlation between the gold and equity markets tends to be historically negative. In India, over 74 per cent of gold investments are held in the form of jewellery, according to the World Gold Council.

But gold in jewellery form tends to yield a lower return on liquidation.

Physical Gold vs Gold ETF’s


High net worth individuals tend to prefer gold bars and coins. However, the risk of holding physical gold is high.

Banks, which are the best source of hallmarked gold, do charge a premium over the market and seldom buy back the gold from individual.

Selling back to the jeweller involves a discount that may erode your profits.

Gold ETFs, in contrast, offer investors the ability to buy gold in small lots, with each unit representing just one gram of the gold. Many Gold ETFs are currently traded on the National Stock Exchange.

When an investor wants to sell units, he has to bear only the brokerage cost; resulting in an effective return that is higher than that on physical gold. Since these units are held in dematerialised form, the holding risk is minimised to a great extent.

Tax Advantage


GETFs also have tax advantages over gold in metal form. Capital gains on physical gold are recognised as long-term gains only if the asset is held for more than 36 months.

Whereas GETF units are treated as debt instruments and taxed accordingly. If the holding period is more than 12 months, you can claim long-term capital gains on these units.

With the benefit of indexation, one can also reduce the taxable capital gains further.

For instance, take the case of an investor who bought GETFs last April for a sum of Rs 1 lakh and disposed of them at a pre-tax return of 17 per cent now.

Even if the investor is not availing of indexation benefits, from the profit of Rs 17,000 he needs to pay long-term capital gains at 11.33 per cent.

That works out to an effective return of 15 per cent (ignoring brokerage cost).

Tax laws allow investors the flexibility to use indexation while calculating capital gains and apply whichever is beneficial to him.

For a HNI, Gold ETFs are not considered as an asset for wealth tax computation, unlike physical gold. Investing through the ETF route, therefore, not only fetches you better returns than physical gold but is also a tax-efficient option.