With returns from equities and debt looking uncertain, gold ETFs could be a good investment option.
Sensex down 30 per cent, debt returns falling below inflation numbers... all pointing towards the fact that making money is becoming more and more difficult. And in these times of uncertainty, gold has been the only instrument that has given good returns for investors.
Sample this: Gold prices have risen from Rs 9,175 (per 10 gm) on January 1, 2007 to Rs 12,550 this July. During this year, the prices have crossed Rs 13,500 quite a few times. And gold exchange traded funds (ETFs), which one can buy and sell directly on the stock exchange through a SEBI registered broker, have returned 41.67 per cent. In the last three months, the returns have been to the tune of 9.98 per cent. Here are a few tips on getting the most out of gold ETFs.
For starters, choose a fund that is large, in terms of assets under management because the expenses are likely to be lower. Also, don't keep on trading (buying and selling) regularly. The reason being, every trading activity attracts brokerage fees that reduces the returns. And look at it as a long-term investment.
Then select an ETF, which has low tracking error. That is, the difference between benchmark indices and fund must be as little as possible. As far as possible, the gold ETF prices should replicate the market prices. Time your buys and sells well to take the advantage of gold price movements. Watch stock market developments by keeping vigil on Sensex and NSE-Nifty movements
While buying, you can start with Rs 5,000 and multiples. Also, it makes sense to buy the gold ETF post listing. This reduces your expenses. Whereas fund houses charge between 1.5 -2.5 per cent on their new fund offerings, brokers charge around 0.5 - 0.75 per cent on the value of transaction. Calculate the units properly.
| ENTRY LOAD IMPACT Investment in gold ETF = Rs 20,000 Price on allotment = Rs 1,000 Entry load = 1.5% Therefore, 1 unit cost = 1,000 + 1.5 = 1,015 Number of units = 20,000/ 1,015 = 19.70 units |
If you want to trade in gold ETFs, it is important to choose the right day. The volume of units being traded on a day is an excellent pointer. Opt for a day when the volume of trade is high because it could help you to get a better price.
There are times when buying units through the broker makes more sense. Some of these conditions include:
- If the difference between buying and selling rates is not high, you can get units through broker, as it would be cheaper.
- If the time lag between NFO and listing is unbearable, you can buy units via broker. It takes 15 to 30 days for the listing to be announced.
- If the gold market is volatile, and the yellow metal’s price increases between allotment date and listing, you stand to lose. Investing through a broker spares this agony.
Also look at other expenses. For this, run a check and find who's charging less. Under various heads, a gold ETF may be charging expenses like investment management fees (1.25 per cent), trustee fees (0.01 per cent), registration through agent (0.08 per cent), custodial fees (0.50 per cent), among others. Sometimes, a fee is charged under "others" head (0.04 per cent).
Further, there is also an exit load, that can go up to 3 per cent. As far as taxation goes, a dividend distribution tax amounting to 14 per cent has to be paid by the investor. Most importantly, don't withdraw before a year as short-term capital gains tax will be charged.
