Should you invest in gold ETFs this Akshaya Tritiya?
Gold prices have set a scorching pace this summer with the yellow metal crossing the milestone of Rs 60,000 per 10 gram in March 2023. And, the uncertain global economic scenario and elevated inflation levels in India could mean that the prices remain buoyant through the year.
“Safe haven assets, especially gold and silver, have seen fantastic rallies since the start of this year, posting 10 percent YTD (year-to-date) gains. It probably is the year of safe havens, as along with global growth slowdown, and geo-political uncertainties, there are also expectations regarding slower interest rate hikes which really is a positive scenario for gold prices,” says Navneet Damani, Head – Research, Commodities and Currencies, Motilal Oswal Financial Services.
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Gold reigns supreme as a diversification tool
Moreover, its key role is that of a portfolio diversifier and retail investors should continue to invest in gold with this objective in mind. “Gold has delivered a 15 percent annualised return since November 30, 2022, while the broader index Nifty 500 has dropped 6.4 percent. You need other asset classes in your portfolio to cushion such falls, and that is the primary use case of gold,” explains Vidya Bala, Co-Founder, Primeinvestor.in.
The economic turbulence in global markets has also led to an environment that is conducive to investments in gold. “The trends that are shaping up are supportive of gold prices. There is too much uncertainty globally at present. There is a possibility of the US slipping into recession and the Federal Reserve pivoting to cut rates because of that. The market is already assuming that the rates are peaking and Fed could start slashing rates down the year to boost growth,” says Chirag Mehta, Chief Investment Officer, Quantum Mutual Fund. Gold’s status as a safe haven will continue to hold it in good stead.
“Then, there is the banking crisis (in the US) too, the first to unravel as a consequence of high rates. We have moved from an era of cheap (funds) to high-cost (funds) and tighter liquidity. This will have implications for the financial markets and what central banks do to protect the economy from its ramifications. If the dollar were to weaken and there is a global recession amidst elevated inflation, with the central bank compelled to support growth, gold could rally,” says Mehta.
Of course, this does not mean gold prices might not see a correction, but overall, the outlook for gold remains bright.
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Also, be aware of the fact that gold is not a low-volatility instrument anymore. “In the last decade, gold has become more volatile. So, it is more suitable for medium- to long-term investment horizons,” says Bala.
If the sunny prospects for gold are prompting you to purchase gold this Akshaya Tritiya, you have several options to choose from, depending on your investment horizon, risk profile and other requirements ― sovereign gold bonds, gold exchange-traded funds (ETF), gold fund-of-funds (FoFs) and, of course, physical gold, among others.
However, the decision-making is bound to be a bit more complex this year due to the drastic changes to the tax structure. Key last-minute amendments to the Finance Bill 2023 snatched away tax benefits that non-equity mutual funds were entitled to.
Also read | Not just debt funds, gold and international funds to also lose from the Finance Bill tweak
Capital gains tax dulls non-equity funds’ lustre
Gold ETFs, as the name suggests, are listed and traded on stock exchanges. You need a demat account to invest in these schemes, unlike regular mutual fund schemes.
They invest in gold and try to mimic the prices of physical gold, before accounting for expenses and tracking error. Fund managers have limited role to play beyond buying pure physical gold and placing it with the scheme’s custodian. Gold funds, or FoFs, on the other hand, are feeder funds that invest in gold ETFs.
Units of gold ETFs and gold funds or FoFs acquired on or after April 1, 2023, are eligible for neither the concessional long-term capital gains (LTCG) tax rate of 20 percent nor the indexation benefit that effectively brings down the tax payable. Any gains made on sale of your investments in gold funds will simply be added to your taxable income and taxed as per the slab rate applicable to you.
Physical gold, on the other hand, will continue to enjoy long-term capital tax of 20 percent with indexation benefits if your holding period is at least three years. “Sovereign gold bonds have a stronger case now. These are more suited for long-term horizons,” says Bala.
Besides an unfavourable taxation structure, a key drawback is that fund houses do not offer systematic investment plan (SIP) facility in gold ETFs, though you can take this route to invest through gold funds.
Gold ETFs and funds retain all advantages, barring tax benefits
Despite a critical tax advantage being rolled back, gold ETFs still hold several aces, say experts. Gold is a portfolio diversifier. Now that equity markets are seeing turbulence, liquidity that gold ETFs offer -even when compared to physical gold – remains a key plus. “Price efficiency and liquidity are crucial when you have to rebalance your portfolio. That is how you add alpha to your portfolio. You have to have liquid assets that are priced well for effective rebalancing. Price efficiency, liquidity, assurance of purity, storage and insurance ― all these advantages are still offered by gold ETFs. Putting everything into context, it still has merit,” says Mehta.
They retain their edge in terms of transaction costs, too. “The biggest advantage that gold ETFs/funds still have are liquidity and lower transaction costs. Gold ETFs are very liquid, and investors can enter and exit without any impact cost even on intra-day basis. The transaction costs are very low too (around 0.50 percent) compared to costs in physical gold in the form of making charges, for instance,” says Harish Menon, Head, Investment Advisory, House of Alpha, an investment advisory firm.
Finally, though gold ETFs ought to mirror physical gold prices, some may falter. “Be careful when choosing your gold ETF. Ensure that it is well-traded. Else, liquidity will be a constraint and the NAV may deviate from the gold prices (which is not ideal as gold ETFs are meant to track physical gold prices closely),” says Bala.