Why gold ETFs strike a chord?
It has been long enough that the raging debate regarding physical gold versus ETFs (Gold Exchange-Traded Funds) has been making rounds in the investor circles. The emerging trend proves to be in favor of the latter considering potential future prospects that it bears.
It is in fact interesting to gauge how a new product from the equity market all of a sudden brought about an unexpected transition in the risk taking appetite of Indians -given to customary beliefs. Known across the globe for their fervor and rationale to maintain a considerable amount of savings in traditional gold, the Indian investor today makes a conscious effort to sway from conventions and embrace alternatives which might not commit security, but pledges high profits!
Anatomy and Physiology
Backed by physical gold, gold ETFs units are listed on an exchange, like the National Stock Exchange (NSE). There is a constant buying and selling procedure at the back end by certified individuals, who closely track spot prices in order to ensure gold prices match with the value of gold ETFs. They are responsible for creating the reserve of exchange traded fund.
The easiest way to delve into gold ETF transaction is by owning a demat account which can be converted to physical gold as and when needed, once it has exceeded a certain threshold of value. The value of ETFs constantly keeps oscillating as per the changing Bullion market of gold bars and the NAV is tracked accordingly.
Exempt from wealth tax, and qualifying for a long term capital gains benefit on holding for just a year, gold ETFs can be transacted at a brokerage of Rs 1 per lakh - a price way lower than equities and e-gold transactions.
On selling gold ETFs within a year, a person is charged on the basis of his regular tax slab which exceeds to 20% post indexation (tallying the value with current rate of inflation), on being sold after a year.
Gold ETFs are available on exchanges to be traded till 3.30 on a regular basis.
Why should you game on ETFs?
Often higher liquidity surfaces as the major condition to experiment with neo-capital products. Let's walk through the merits of ETFs and discuss the scope of investment:
- Liquid Asset- While investing, the ulterior mindset is to be able to capitalize on the asset during emergency hassle-free. ETFs i.e. paper gold serves the cause at ease. One can sell it off at discretion during the trading session without resorting to a goldsmith.
- Fringe Costs- Getting a gold jewelry made demands a whopping 15% to 20%. By the time one actually plans on wearing them, the age old designs might just run out of fashion. Whereas, the ETFs insulates us from these concerns with transaction cost as low as just 1 %.
- Hallmark of Purity - Retail gold investors are often heard complaining about returns depreciating during the selloff. Probably the investor was too naive to decipher the product lacked purity. ETFs do away with such concerns.
- Speaking of security, gold investments ought to be stored in vaults and safe, mostly, by paying high security price to the facility. On the contrary, an individual's Demat account holds his ETF reserve.
- The market does not demarcate a cap on minimum ETF investments. One can even consider investing on just a gram of gold, which otherwise is an impossibility in case of physical assets.
- With ETF, one can fully capitalize on the opportunity to reap returns when he feels the time is ripe for a tradeoff. Also, ETFs come in units, making it all the more alluring owing to the fact that unlike physical assets, a partial portion can be banked upon.
Ushering a new dawn...
Talking about the history, Gold Exchange Traded Funds was first introduced in Australia way back in 2003 simultaneously with the Gold Bullion Security launch. Ever since, it has gained significance in India as well as many other countries across the globe.
Introduced first by Benchmark Asset Management company in 2007, Gold BeEs was the first gold ETF in India which brought about a paradigm shift in the ideology of Indians- ranked as the top buyers of gold in the world. The innate attribute of ETFs being less volatile and its potential to beat inflation, has in a short while earned the faith of investors as an asset that pledges security.