In this Article we would be discussing in detail about Gold ETF. As we all know that when we buy gold from a jeweller, there is no surity of the purity. When we buy Gold coins or bar through banks, we shell out around 15-20% higher price, however when we want to sell it back, bank will never purchase it . If you want to sell your coin or bar bought by the bank to the Jeweller, they will not give anything more than the market price.
If you buy Gold Jewellary as an investment then it doesnt makes sense as Jewellers command making charges which ranges from 150- Rs 500 per gram which is approximately 10%-25% of the price of the 22 carat Gold . So the question arises, how to invest in Gold leaving back the costs being charged by the Jewellers and Banks.
If you buy Gold Jewellary as an investment then it doesnt makes sense as Jewellers command making charges which ranges from 150- Rs 500 per gram which is approximately 10%-25% of the price of the 22 carat Gold . So the question arises, how to invest in Gold leaving back the costs being charged by the Jewellers and Banks.
How we can invest in Gold
- Physical Gold/Jewelry
- Commodity Exchange
- ETFs
What is a Gold Exchange Traded Fund (ETF)?
Gold ETF is a security listed on the stock exchange available for trading with an intention to offer investors a means of participating in the gold bullion market without the necessity of taking physical delivery of gold.
A Gold ETF is designed to provide returns that, before expenses, closely correspond to the returns provided by domestic price of Gold.
Demat account is mandatory if you want to invest in Gold ETF. Buying and selling of units in Gold ETF happens in National Stock Exchange which can be done through your broker.
Gold ETFs in India
- Total asset under management Rs 904 crore under Gold ETF
- Inflows have jumped 32 % in August, 2009 compared with the same period last year
- Net inflows of Rs 15 crore in August, 2009*
- Gold ETFs have given impressive annual returns of around 33.46% p.a
Who can invest in Gold ETF?
- An Adult Individual who is a resident of India
- Non Resident Indian
- Foreign Institutional Investor registered with SEBI
- Banks and Financial Institutions􀂉Companies, Trusts and Cooperative Societies
- Partnership Firms, a HUF, Mutual Fund registered with SEBI, etc.
Benefits of investing in Gold ETF
- Transparent Pricing: Two way quotes (buy & sell) during market hours on NSE.
- Ideal investment for retail investor: Minimum one unit can be bought or sold on the exchange.
- No Securities Transaction Tax for trading on the exchange.
- Quick and convenient trading in dematerialized form through brokers.
Please find below the comparison of investment of Gold through various sources
Parameters | ETF | Jewellers | Banks |
Form | Demat Form | Bar or Coin | Bar or Coin |
Security | Taken care by Fund | Investor’s Concern | Investor’s Concern |
Transparency | Very High | Very Low | High |
Impurity Risk | Very Low | High | Very Low |
Pricing (for retail investors) | Transparent. Will be traded at NSE | Neither standard nor transparent | Not standard. Huge Markup, 10- 15% ideally i.e. you pay around 15% higher price than prices prevailing in the market. |
Selling Back | Sell back on exchange | Conditional and uneconomical | Restricted |
Bid Ask Spread | Very Low | Very High | Can’t Sell back |
Denomination | 1 gram and in multiples of 1 gram | Available in Standard denomination | Available in standard denomination. |
Tax Implications
Will I have to pay any tax?
Since GETFs are being sold as non-equity (there is no buying/selling of shares) schemes there will be dividend distribution tax (DDT) you will have to contend with. That is dividend will be taxable in the hands of investors if and when these GETFs declare dividends. Simply put, dividend is money distributed to unit holders if the scheme declares a profit. Current law stipulates DDT of a shade over 14 per cent for individual investors and a shade below 22.5 per cent for corporate investors. This tax is inclusive of surcharge and education cess (a type of tax). However, the good news is there will be no wealth tax or securities transaction tax, STT, to contend with when you sell your GETFs. There is no STT because this is a non-equity scheme. STT is applicable only when shares are bought or sold. The case for wealth tax would have existed if you were in possession of gold in physical form. The magic of GETFs lies in this. They convert your money into gold which again is converted into units in Demat form. So as a matter of fact you don't own gold in physical form. Hence there is no wealth tax.
ETF | Jewellers | Banks | |
Wealth Tax | No | Yes | Yes |
Short-term Capital Gains Tax | Applicable before 1 year | Applicable before 3 years | Applicable before 3 years |
Long-term Capital Gains Tax Applicable | Applicable after 1 year | Applicable after 3 years | Applicable after 3 years |
- Long–Term Capital Gain Tax of 10% or 20 % with indexation will be applicable.
- Short-term Capital Gains-The tax structure under which the investor is applicable.
- No Securities Transaction Tax will be applicable on units traded on the Exchange.
Product Features
- Type: An open-ended Gold Exchange Traded Fund that tracks the domestic prices of gold through investments in physical Gold.
- Investment Objective: The investment objective is to seek to provide returns that closely correspond to returns provided by price of gold through investment in physical Gold (and Gold related securities as permitted by Regulators from time to time). However, the performance of the scheme may differ from that of the domestic prices of Gold due to expenses and or other related factors.
- Benchmark Index: As there are no indices catering to the gold sector/securities linked to Gold, currently Gold Exchange Traded Fund shall be benchmarked against the price of Gold.
- Purity of Gold: All gold bullion held in the scheme’s allocated account with the custodian shall be of fineness (or purity) of 995 parts per 1000(99.5%) or higher.
Benefits of investing in Gold ETF
- Transparent Pricing: Two way quotes (buy & sell) during market hours on NSE.
- Ideal investment for retail investor: Minimum one unit can be bought or sold on the exchange.
- No Securities Transaction Tax for trading on the exchange.
- Quick and convenient trading in dematerialized form through brokers.
- No additional storage and security cost.
- Accepted as collateral for trading on NSE.
