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Should you redeem gold ETFs?

If you don't have any short-term liquidity requirements, don't cash out just yet, say experts

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With domestic gold prices on the rise, there has been an increase in redemptions of gold exchange traded funds (ETF) in recent times. But it is not the time to exit the yellow metal just yet, as prices are likely to remain firm on the back of a weak rupee, say experts.  

Domestic gold prices are rising on the back of a weak rupee and are currently hovering around Rs 30,845 per 10g. This has seen gold ETFs post a return of 8.34 per cent on average over a six-month period, according to data from .

Prompted by this rise, some investors are redeeming their investments and taking profits. Gold ETFs’ assets under management have fallen to Rs 9,894 crore in October from Rs 10,669 crore in July, according to data from the Association of Mutual Funds in India. The category has seen redemption worth Rs 1,277 crore between July and October this year.

If you are not short of liquidity, avoid redeeming your gold ETFs for now. Domestic gold prices provide a hedge against a weakening rupee as gold prices rise if the rupee falls. Internationally, gold prices are expected to remain stable whereas the rupee is showing signs of weakening. In such a scenario, investors must stay invested in gold.

Says Vidya Bala, head of mutual funds research, FundsIndia.com, “Don't sell merely to take advantage of the rise in gold prices. Over a five-year period, gold has given double-digit returns and that is unlikely to change.”

Gold ETFs have given returns of 11.43 per cent and 19.34 per cent over three-year and five-year periods respectively, according to data from Value Research Online. Gold also provides a hedge against inflation. Says , director, WealthRays Group (securities and commodities), “Domestically, prices are high due to a higher import duty and rupee depreciation. But investors must not stay off gold completely since it is one asset class that can beat inflation,'' he says.

Only if gold has increased substantially in your portfolio should you consider re-balancing your portfolio. Agreeing that redemptions have increased because of the price effect, Debashish Mallick, chief executive, IDBI Mutual Fund, says investors should stick to prudent asset allocation depending on their risk profile and financial goals. “For instance, one should not have more than five to 10 per cent exposure in gold as of now. If you have more than that, you can consider selling in parts to hedge yourself against a rise in gold prices in the near term,” says Mallick.

As compared to physical gold, ETFs are a better bet from a liquidity as well as taxation point of view. In case of ETFs, taxation is similar to debt funds. You will be liable to pay long-term capital gains tax if you remain invested for more than a year. In case of physical gold, you will need to remain invested for more than three years to get tax benefits.

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