Feb 26, 2009

Investing in Gold ETFs - FAQs

It should not come as a surprise that gold prices have crossed Rs 15,000 (per 10 gram) mark recently. I’ve already discussed that gold is the best performing asset class during economic crises. It is a great portfolio diversifier and therefore around 5 to 10 per cent of your portfolio should be allocated to gold.

So, if you’re planning to invest in gold, know that out of '5 different ways to invest in gold', 'Gold ETFs are considered as best' due to host of benefits they provide. This post attempts to explain the frequently asked questions (FAQs) on Gold ETFs.

1. What are gold ETFs?
Also known as paper gold, Gold ETFs are mutual fund schemes that invest in standard gold bullion (99.5% purity). They are special types of exchange traded funds (ETFs) which tracks the prices of gold (i.e. whose value is based on price of gold) and are convenient and inexpensive alternative to owning physical gold.

2. What is the origin of Gold ETFs?
The World’s first Gold ETF (exchange-traded fund) was launched in Australia in March 2003. In United States, first Gold ETF was launched in 2004.

But the idea was originated in India way back in 2002 when Benchmark filed a proposal with SEBI in May 2002. However, it could not be launched at that time due to not getting the required regulatory approval. Finally, in Feb’2007 Benchmark launched India’s first gold ETF.

3. How do Gold ETFs differ from physical gold?
Unlike physical gold, Gold ETFs are held in demat / electronic form and can be traded on a stock exchange just like buying and selling stocks.

4. How are Gold ETFs better than physical gold?
Gold ETFs definitely score over physical gold, because they eliminate the hassles and drawbacks of physical gold (e.g. impurity risk), are more tax-efficient and allow you to invest in small amounts.

5. How are Gold ETFs better than Gold Funds?
Gold ETFs are better than Gold Funds because in comparison to Gold funds, Gold ETFs are less volatile. While gold ETFs invest in physical gold, Gold Funds invest in equities of gold mining companies; and gold stocks are more leveraged to the gold prices than the gold itself.

6. What are the returns of Gold ETFs?
Returns of all Gold ETFs schemes are almost same and more or less similar to physical gold because they are passively managed fund and closely track the performance and yield of gold in the spot market. Put simply, they just hold physical gold on behalf of investors and no active fund management (to take advantage of price fluctuation in gold) is involved.

7. How are Gold ETFs taxed under Income Tax Act, 1961?
Gold ETFs schemes are treated like non-equity mutual funds for the purpose of taxation. So, the gains attract short term capital gains (STCG) tax if held for less than one year and long term capital gains (LTCG) tax if the period of holding is more than a year. As far as dividend distribution tax (DDT) is concerned, the question doesn’t arise as none of the Gold ETFs in India have declared any dividend so far.

8. Which are the currently available Gold ETFs in India?
As of now, there are five gold ETFs available in India; one each by Reliance, UTI, Benchmark, Quantum and Kotak fund house.

The NSE symbols of Gold ETFs are (GOLDBEES, GOLDSHARE, KOTAKGOLD, RELGOLD, QGOLDHALF)

Gold Benchmark Exchange Traded Fund --> GOLDBEES
UTI Gold Exchange Traded Fund --> GOLDSHARE
Kotak Gold Exchange Traded Fund --> KOTAKGOLD
Reliance Gold Exchange Traded Fund --> RELGOLD
Quantum Gold Exchange Traded Fund --> QGOLDHALF

9. How to invest in Gold ETFs?
Gold ETFs are listed and traded on national stock exchange (NSE). They are held in demat form just like the stocks. You require a DMAT account to invest in them (and for that you also require a PAN). Besides, you also require a trading account with a broker (who is a member of NSE).

Typically, each unit in Gold ETF represents one-tenth of an ounce of gold. In other words, small sum is required to gain exposure to the gold price. For example, while in case of Gold Benchmark Exchange Traded Fund (GOLDBEES), each unit corresponds to one gram of gold, Quantum Gold Exchange Traded Fund (QGOLDHALF) is available in 0.5 grams of gold.


Also see

1. NCDs - Top 10 FAQs
2. ULIPs - Top 10 FAQs
3. 5 Different Ways to Invest in Gold
4. Selecting the Best Equity Diversified Fund

53 comments:

  1. Hi Fisher,

    Thanks for all the nice tips and faqs regarding the Gold ETFS.

    Just want to know few things from you more :

    1) Which among the five are the best rated to choose for investiment

    2) What is the minimum amount we need to start buying the etfs.

    Thanks,
    -Vikram.
    ps: I like the way you put all the content in a very simple language and easy to understand.
    example : PPF calculator helped me a lot , Thanks Fisher.

    ReplyDelete
  2. Vikram, currently six gold ETFs are available in India. The latest entrant is SBI Gold ETS (April 2009).

    There is no best gold exchange traded fund (ETFs) as returns from all the gold funds available in India are more or less the same. It is because gold ETFs are passive funds tracking the price of same commodity (i.e. gold).Besides the expense ratio of all the gold ETFs is also same (around 1%).

    Investing in gold ETFs is exactly similar to the stock investing i.e., minimum trading lot for gold ETFs in the market is one unit. In other words, you’re allowed to purchase even unit of the gold ETF from a stock exchange. Now, the price of one gold ETF unit reflects the price of one gram of gold (half gram in case of Quantum QGOLDHALF). It means that minimum amount required to invest in gold ETFs (based on current prices) is approximately Rs 1600 (around Rs 800 in case of QGOLDHALF).

    ReplyDelete
  3. Simply gr8 article. and the best part is it covers all the things.

    thanks author for your time and efforts.

    ReplyDelete
  4. Nice Way of puting thing across reader's...
    Hat's off to you...
    Thanks Fisher

    ReplyDelete
  5. Very good article which gives all basic info regarding Gold ETFs. I have following questions:
    1. If I have D-mat a/c, can I invest first time in Gold ETFs through physical application forms from AMCs or is it possible to buy them only via stock broker?
    2. I heard about one Gold ETF from DSP Black Rock as well. How is that fund stand compare to others?
    3. Is it possible to systematically invest in Gold ETFs like SIP?

    Looking for your quick response.

    Thanks,
    Nirmal Jain, Hyderabad

    ReplyDelete
  6. Nirmal: Here is my point-wise reply to your questions:-

    1.ETF units (including Gold ETFs) are not sold by AMCs directly to public.

    2. DSP Black Rock Gold Fund is not a Gold ETF. To understand the difference between ‘Gold ETF’ and ‘Gold Fund’, please read another post: “5 Different Ways to Invest in Gold”. CLICK the link given just above the comment section.

    3. Unlike regular mutual funds Gold ETFs are to be purchased through a broker and therefore SIPs (Systematic Investment Plans) are not available. However, you can create your own SIP by investing fixed amount at regular intervals. The other alternative is to have an ‘Auto Invest’ trading account with Kotak Securities which allows you to do a SIP in Gold ETFs.

    ReplyDelete
  7. Precisely the information I was look for. Thanks for the post.

    ReplyDelete
  8. Thanks for article ...it cover every aspect

    ReplyDelete
  9. Hello Fisher,
    Good article, but I have a doubt. As on 26th Nov 09, the prices are as follows:
    Goldbees: 1767.52
    Goldshare: 1768.79
    Kotakgold: 1772.9
    Relgold: 1720.58
    When all these firms deal with gold at the same international price and their expense ratio is same, why is the difference in prices? Is buying Relgold more sensible than kotakgold?

    ReplyDelete
  10. Sridhar: Good Question! The difference among the NAV of various Gold ETFs is due to tracking error which is caused by many reasons. The fund expense is only one of them. The other major factor is cash holdings.

    However, the important point to remember is that the current NAV is not going to impact the future returns from a Gold ETF. So, it won’t make any difference whether you buy RELGOLD or KOTAKGOLD.

    ReplyDelete
  11. Fisher... thanks for the information on ETF..one of the better articles on the subject !

    ReplyDelete
  12. I am having demat account as well as trading account with Kotak securities.Could you please let me know whether I can buy Gold ETF directly from them. Can I trade any time a day even after close of the market hours. Which Gold ETF would be better to invest. Is there any lock in period, or any time I can sell out my stock.

    Regards,
    Anchal Agrawal

    ReplyDelete
  13. Anchal: Have you read the post? If not, please read and if yes then reread.

    ReplyDelete
  14. Hi Fisher,

    I have been thinking of investing in Gold ETF for a long time. After reading your post, I got the complete picture. Now I am going to start investing in God ETF regularly.

    Thanks,
    Prem.

    ReplyDelete
  15. Instead of these ETFs & MFs, why not gold biscuits in desired weight be bought from nationalised banks and major post offices in Indian metros? They sell with Hallmark certificate. Is resale allowed if sold across these counters? Does it suffer commission on resale?

    Rgds,
    Chandru

    ReplyDelete
  16. Chandru: Read “Why Gold ETFs are considered better than physical gold?” And also see "5 Different Ways to Invest in Gold”. If your question still remains unanswered, let me know.

    ReplyDelete
  17. HI Fisher,

    Thanks for sharing this information with all of us.

    Last year due to recession everone was moving towards the gold and people get good return.

    What is the expectation for this year?

    THanks
    Amitesh

    ReplyDelete
  18. Amitesh: Sorry, I’ve yet to acquire the sixth sense.

    ReplyDelete
  19. Hi Fisher,
    As you said in your post, ETF holding are applicable to long term capital gain (LTCG)for holding more than a year. Can you please let me know what is the applicable rate for LTCG and also for STCG. Will this be directly deducted by the bank when i will be selling the units?

    Thanks,
    Mohammadi

    ReplyDelete
  20. Mohammadi: For the tax rate applicable on LTCG & STCG, please see: How to calculate your income tax liability. You can find the link in the Archives section.

    Also note that there is no involvement of a bank when you buy or sell gold ETFs.

    ReplyDelete
  21. Gr8 article - simple and to the point.

    One question.Can NRIs buy this through DMAT accounts?

    ReplyDelete
  22. Hi Fisher

    Thanks for the nice article. One question though:

    If Gold ETFs are bought and sold on the NSE, is STT payable. If STT is paid then short term capital gain would be taxed at 15 % and Long term capital gain at 0%. Is that right?

    ReplyDelete
  23. Ajit,

    STT is not applicable on gold ETFs.

    ReplyDelete
  24. Hi Fisher,

    I came to know (might be CNBC -around March-09) that some Jewelry shops do accept(purchase directly from their customers) these Gold ETF's as a mode of payment against the purchases made by the customers. Please let me know whether this information is correct or not.

    ReplyDelete
  25. Anagh,

    Sorry, I’m not aware of any such practice. What purpose does it serve anyway?

    ReplyDelete
  26. Hi fisher,

    I have a denat account with indiainfoline where I purchase shares online. Can I use the same account for Gold ETF? Is there a need to submit an application or any other document.

    Thanx in advance.

    -Alok

    ReplyDelete
  27. Alok,

    Yes, you can use the same DMAT account for Gold ETFs. No need to submit any additional document.

    ReplyDelete
  28. Hi Fisher,

    Very good article on Gold ETF. I had 2 questions.
    1. I still did not understand why there is difference in NAV. You talked about tracking error. could you pls elaborate...
    2. what would be the brokerage to buy and sell gold etf?
    Thanks
    Ashwin

    ReplyDelete
  29. hi fisher,

    I m a starter in investments. can you pls let me know how can i start with gold etf and what should be minimum amount according to today's market which is 18600 rs INR to get good returns.

    could you please mail me regarding such information on palipali@rediffmail.com also.


    thanks
    pritpal singh

    ReplyDelete
  30. NITIN SHARMA +919784590003May 26, 2010

    hi fisher
    first of all like to give you a round of applaud for superb posting on gold ETF.Beleive me i was looking for such info. for long time just want few more guidance from your side as we all know that you are having bulk of knowledge.
    My question is :--
    I want to invest 1k to 2k via monthly investment in gold etf & want the maximum returns & i am ready for long term investment i.e 10-15 yrs so in which fund will you go for if you would have been at my place & why ? IF YOU CAN GIVE YOUR CONTACT NO. THEN PLZZ SHARE SO THAT I CAN GET THE SHARING OF YOUR KNOWLEDGE

    ReplyDelete
  31. AnonymousJune 13, 2010

    Thanks for your wonderful Article Fisher and your patience in answering questions :)

    I have one clarification, I am currently in USA, I hold DMAT Account in India and as well as here. Is ETF investing in India is better than in USA.
    Regards,
    KK

    ReplyDelete
  32. thanks for educative article.

    I have a small query.

    If I am holding units of ETF and want to sell them. But if there are no buyers, will AMC buy from me?

    ReplyDelete
  33. Wonderful Piece of information... covers almost everything I wanted to Know about Gold ETFs.

    ReplyDelete
  34. Thyanks for sharing the information.
    My query is that whether I can start investing in Gold ETF through SIP similar to other Mutual Funds?

    ReplyDelete
  35. Dear Fisher,

    I am an NRI resident in the Gulf.

    i have a trading account.

    However when I try to purchase Goldbees, Kotak Gold ETF or any other i get a message that NRIs are not allowed to invest in Gold EFTs.

    Is this correct as per regualtion or is it a system error ?

    AshRaj

    ReplyDelete
  36. Can NRIs invest in Golf ETFs like Gold Bees or Kotak Gold ETF ?
    AshRaj

    ReplyDelete
  37. Gold ETFs are considered as assets, so in case of any profit booked in <1yr, will be added to our income and taxed as per normal tax slabs. Is that right?

    ReplyDelete
  38. Is STCG on gold etf added to our income and taxed as per slabs ?

    ReplyDelete
  39. Ash Raj,

    Yes, NRIs can invest in gold etfs through NON-PINS Account.



    Leolobo87,

    Yes, short term capital gains from sale of gold etfs are added to your income and taxed at maximum marginal slab rate applicable to you.

    ReplyDelete
  40. I agree with you that GOLD ETF are better than investing in physical gold. Gold prices are expected to go up further in 2011, as per the analysts. please see my posting in this in http://fusions.wordpress.com

    Regards,
    Ramesh, Dubai

    ReplyDelete
  41. Hi Fisher,
    Thanks for the wonderful post on Gold ETF. I am planning for some investment but have just one doubt. As per the current rates of gold in the market, I hope I am not late in investing in them. So, is this the right time to start investing in Gold ETF or should I wait?

    Divya

    ReplyDelete
  42. Divya,

    It's very simple...invest in small amounts over a period of time.

    ReplyDelete
  43. Hi

    I want to invest 10k to 15k in UTI ETF or BenchMark ETF in one time. Pls suggest, is it okay to invest in large amount at a time or do u want me invest in small amount over a period of time?

    rama

    ReplyDelete
  44. Rama,

    It is always better to invest in small amounts over a period of time.

    ReplyDelete
  45. Dear Fisher,

    I know you have responded to Divya on the same. Many thanks for sharing such useful information assisting layman to take decisions in investing.

    As the NAV is already high looking at current Gold Prices, do you think I am a late entrant in the game, or as it is SIP can I start investing in small amoutns over a long period of time as you suggested.

    Looking forward.

    ReplyDelete
  46. Deb,

    Predicting asset prices in uncertain markets is a futile game… the basic purpose of investing in different asset classes including gold is risk reduction by diversification. So, it is never too late to start investing systematically over a period of time rather than timing the purchase.

    ReplyDelete
  47. Hi My name is Bhuban, I want to invest 50K in Gold for long term atleast for years. Would like to know which one will be best GOLD ETF or Physical Gold as per returns, and cost effective like while buying what are things will be charge(interms of TAX, service tax, or anymore also)to me in GOLD ETF and as well as physical gold?

    And while selling after 5 years what are the things will be charge to me or what are the things I have to pay in both Forms of Gold (ETF and Physical Gold)? after 5 years also If I sale Gold ETF I will be charge for TAX or any other thing?? Kindly explain me in details, will be alwzys thankfull to you :).

    Waiting for yor reply.

    Thanks & Regards
    Bhuban

    ReplyDelete
  48. Hi Fisher,
    Can you please explain basics of recent entrant 'Reliance Gold Saving Fund' and 'Kotak gold fund (due in march 2011)'. They claim that they invest in Gold ETF and can be done in SIP way..
    My question is ,
    1) Which is better to invest in ? these funds or gold ETF directly over regular intervals?
    2) Why these companies publish such funds if one can directly invest in gold ETF ?

    Thanks..
    -NB

    ReplyDelete
  49. Thanks Fisher. Came across your post while searching the net for ETFs and it has been very informative.

    Had a related question: Should I be investing in Index ETFs or Index funds. I am looking for investing in long run and hence intra-day liquidity is not really important.

    Thanks
    Somesh

    ReplyDelete
  50. Hello Fisher,

    u r doing a great work...helping people like me to understand the A to Zs of investment.The article "Investing in ETFs-FAQ" is very helpful.
    I have one question:
    HDFC has recently released "HDFC gold fund", which is an open-ended Fund of Fund scheme investing in HDFC Gold ETF. Is this same as HDFC ETF? Is the returns that would be given by the above mentioned scheme same as an ETF scheme? Pl Clarify

    Regards,
    Jaya

    ReplyDelete
  51. Hi,

    Please elaborate what is tracking error? I am very much confused.
    Narayanan.

    ReplyDelete
  52. IF you take a view since inception then the best Gold ETF to invest is Golman Sachs ETF, better known as Gold BeES...

    well, Gold ETF is the easiest available way of investing in the gold, at the same time the tracking error of most of ETFs is negligible.

    In order to invest in gold etf one can go for the IPO route, or can buy them directly on exchange through broker, But gold ETF can also be bought directly from the Fund house, provided the investor buys minimum of 1000 units.

    Source:

    http://www.reformistindia.in/2011/11/14/what-is-gold-etf-how-to-invest-in-gold-etf/

    ReplyDelete
  53. I want to know is there any ETF which gives option to its investor to convert their investments in physical gold?

    ReplyDelete

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