Due to lower transaction costs and tax benefits, net returns are better.
If you are looking to buy gold this festive season, ask yourself these questions. Do I want to buy it for consumption or investment? If consumption, then is the need immediate or can it be waited upon for the next couple of years or more? The answers to these should help you decide your course.
Though festive season means buying gold for consumption purposes, a lot of people do look at investing in it too. For consumption, jewellery is the only option. But if the consumption is deferred, one can look at systematic investment plans (SIPs) in gold through commodity exchange. You can invest small units, even one or half a gram. Or, there is the jeweller who puts up offers of paying monthly and buying the jewellery item at the end of tenure (one to three years, usually). So, in the immediate or near future, one can look at buying jewellery directly or avail of the jeweller’s option. But if the tenure is longer, go for SIP.
For pure investment purposes, gold ETF and gold funds (fund of funds) are mutual fund schemes that would allow you to invest in gold without actually owning gold physically. These have given phenomenal returns this year. According to Value Research, gold funds have been the best performing category in the last one year. These have given investors returns of 33 per cent in the last one year.
"Gold ETFs are traded on the exchange platform and, therefore, mean low costs of trading to the investor. An investor can invest in very small amounts and physical delivery is possible for units equivalent to a kg of gold and above", says Ritesh Sheth, fund manager at SBI mutual fund.
There are 13 gold ETFs and gold funds one can choose from. Together they have assets worth Rs 7,800 crore.
There are other advantages of owning units of gold ETFs. "There is no worry of storage or thefts as they are in demat form. Units of ETFs will not depreciate when you sell. While buying physical gold, you are at the complete mercy of the jeweller on pricing, but in an ETF, the underlying gold price is the same. Though the asset management charges may vary from fund house to fund house", explained Naveen Mathur, Associate Director of Commodities at Angel Broking.
You can pick the fund with the least expense ratio. The expense ratio of these funds can be anywhere between 0.25 and 1.50 per cent.
When you purchase gold coins from a bank, you need to pay a premium of five to seven per cent, which is not the case in gold ETFs.
"Since gold ETFs are mutual fund units, no wealth tax is applicable on them. If you have physical gold of more than Rs 15 lakh as part of your wealth, one per cent wealth tax will be levied", says SBI's Sheth.
Also, long-term capital gains benefits are there for ETFs after one year, while the physical gold kicks in after three years. So, if you look at all the operational issues, tax issues, ease of management, one should consider gold ETFs as an investment option this festive season.
Net returns of gold ETFs will be higher, says certified financial planner Arnav Pandya. "When buying gold coins or jewellry, about four to five per cent is eaten away on transaction costs, due to which the net returns come down. The cost of transaction on ETFs is lesser", he adds.
The sharpest spike in four decades is likely to have a limited upside.