Gold ETF's- As precious as Physical Gold!
Gold, the precious metal has been a treasure to all class people. Gold is considered highly auspicious, it is purchased or gifted on almost every festival in India. The desire for buying gold coins, jewellery etc is not limited during festivals but also as an investment or trading for achieving financial goals. However with the budget imposing financial burden on buying jewellery
and proposes tax collection at source on purchase, investing in physical gold has become less attractive. In this situation investing in gold ETF has showed it charm!
What is Gold ETF and how does it work?
Gold ETFs or Gold exchange-traded funds are open-ended mutual fund schemes that will invest the money collected from investors in standard gold bullion (0.995 purity). The investor's holding will be denoted in units, which will be listed on a stock exchange and can be traded as equity shares. An investor can exchange the units either directly from the mutual fund or from the stock exchange.
We at Fpguru.com will like to share with you some information towards the importance of why one should invest in Gold ETFs and its benefits.
Term for Capital Gain tax falls from 3years to 1 year- physical gold is to be held for more than 3 years to qualify for long-term capital gain tax and for less than 3 years the gains are taxed at 30 per cent, however gold ETFs are treated as equity shares and so are qualified for long term capital gain tax of 10 per cent without indexation or 20 per cent with indexation on profits made after 1 year.
Not liable for wealth tax or STT- when investment is made in Gold ETFs, gold is in paper form and no wealth tax is levied. However when physical gold is bought during auspicious days or when jewellery purchased one doesn’t realise when they have crossed the limit of paying wealth tax. Also since ETF are classified as mutual funds one does not have to pay Security Transaction Tax.
Gold ETFs are more affordable as it can be purchased in small quantities- The price of an ETF unit is linked to the price of 1 gram of gold. Thus even a small investor can purchase it in small denomination and not lose out on the benefit of trading in gold and its returns. One can also purchase gold with regular investments (SIP) and increase the investment in an effective form.
Low cost & low risk incase of storage- there is always a threat of theft incase of physical gold. If it is kept in a bank locker, safety increases but at a cost i.e. one has to pay the storage charges regularly. However, since gold ETFs are listed in stock exchange they are either kept in the demat form or held with the custodian. Also one doesn’t have to pay any making charges incase of jewellery, commission etc if gold ETFs are purchased.
Easy liquidity- since gold ETF units are freely traded on stock exchange one can sell at the real time prices, also one can avoid charges like commission, issues for purity etc. Uniform pricing in Gold ETF’s offers no scope for price discrimination that is experienced in case of physical gold at the jewellers.
Investment in physical gold, jewellery is not a bad option if the goal is child’s wedding. However gold ETF is a better option if the investment is made for a short-term goal, thus if you as an investor are clear about the reasons for investments Gold ETF is the investment. Gold ETFs turn out to be a good investment option for investors to hedge their assets against the uncertain global market scenario. Also it gets difficult to sell jewellery to accomplish a financial gold as one had emotion attachment towards it, this is not the case incase of gold ETFs as the gold is not physically present.
Thus with the various benefits of investing in gold ETF, attached with satisfying the need of small investors to invest, liquidity, low risk and accumulation of units through SIPs has made Gold ETFs more and more attractive.
By Namrata Shah.
The writer is working with FpGuru.com as a Financial planner.
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Comments
thank you very much for the information and clarity.
Informative article. While slowly the shift is happening towards ETFs, people really dont know how much to invest in gold i.e. how much should it form part of their portfolio. Also, they make a mistake of treating as investment, while its really only a hedge, which gives inflation adjusted less-volatile returns.
Thanks for bringing out this post and keep up the good work.
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