MC Review | Gold BeES gets budget boost: Should you invest?
Budget 2024-25 has put gold ETFs a step ahead of gold mutual funds. The threshold to claim long-term capital gains is one year, while for gold mutual funds it has been fixed at two years. Gold BeES by Nippon India Mutual Fund is India’s largest gold ETF
Gold Exchange-Traded Funds (ETFs) are now more appealing after Budget 2024. According to the new tax structure, the gain from the sale of units of gold ETFs will be subject to a capital-gain tax of 12.5 percent, if held for more than a year. Earlier, irrespective of the holding period, gains were taxed at the slab rates. Gold ETFs are passively managed mutual fund schemes investing in standard gold bullion of 99.5 percent purity. They track the domestic price of gold closely. Gold mutual funds, on the other hand, are fund of funds (FoFs) that invest in gold ETFs. Currently, there are 17 Gold ETFs. Nippon India ETF Gold BeES (Gold BeES), a MC30 pick, scores on all the parameters, including higher liquidity in the exchanges and lower tracking error.
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Gold ETFs are likely to attract more inflows now Budget 2024 has made it clear that Gold ETFs are brought under the capital-gain regime. Arun Sundaresan, Head, ETF, Nippon Life India AMC, says, “Since gold ETFs are listed on exchanges, investors can now avail of long-term capital gain (LTCG), if the asset is held for 12 months. This will be applicable for transactions from April 1, 2025, onwards”. Short-term capital gain (STCG) would be taxed at the applicable slab rate. On the other hand, since gold FoF are not listed, investors can claim LTCG, if they've held the asset for two years, adds Sundaresan.
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Cut in customs duty: an opportunity for new investors Another big move in the Budget was a reduction on the basic customs duty on gold and silver from 10 percent to 6 percent and Agriculture Infrastructure & Development Cess (AIDC) from 5 percent to 1 percent. It will effectively reduce the overall taxes on gold from around 18.5 percent (including GST) to 9 percent. Chirag Mehta, CIO, Quantum AMC, says that this could lead to a commensurate decline in gold prices. “For investors who owned gold, this reduces their returns to that extent. But for investors who have yet to allocate to gold, this provides an opportunity to allocate at much lower gold prices due to the reduction in duties”, Mehta adds.
Don’t go overboard, gold is just an asset allocator As an asset class, gold has done exceedingly well over the last few years. The gold ETFs category has delivered a compounded annualised return of 13 percent in the last one year. Factors that drove gold prices include buying by more central banks, geopolitical uncertainties, moderating US retail inflation numbers and anticipation of a less aggressive US Federal Reserve. Some catalysts that could push gold prices back up are a weak dollar, festive time demand, US elections, geopolitical risk and central bank policies, points out Jigar Trivedi, senior commodities analyst, Reliance Securities. Gold may not be an outperforming asset class all the time but it is a hedge against market uncertainties and a useful portfolio diversifier. It can account for 5-10 percent of your portfolio at any point of time.
Gold ETF is a good option to invest in the yellow metal. Gold ETFs are passively managed mutual fund schemes traded on the NSE and BSE, just like equity shares. Investors can buy and sell them at any time during market hours, using their demat account.
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MC30 -- the curated basket of 30 investment-worthy mutual funds -- recommends Nippon India ETF Gold BeES (Gold BeES) under the passive funds’ category.
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How to pick a gold ETF? Look at its size (the larger the better), liquidity in the secondary markets, tracking error (TE), expense ratio, impact cost and premium or discount of the spot price to its NAV. Gold BeES scores on all counts. Liquidity or the trading volume plays an important part in ETF selection to buy and sell at the right prices. The average daily total volume traded in Gold BeES on the NSE over the last one year was Rs 31 crore, the highest among Gold ETFs.
One of the drawbacks in ETF investing in India is that most of the ETFs are not actively traded. If you decide to buy ETFs, choose those that are traded every day, with reasonable volumes. However, liquidity is not a concern in Gold BeES as it has been actively traded consistently in the exchanges.
During trading hours, the spot price of ETFs may trade at a premium or discount to their iNAVs (indicative NAVs). This occurs due to illiquidity and less-active market makers. Market makers are authorised participants appointed by the AMCs to keep the spot price close to the fair value. If the price of the ETF trades above its iNAV, the ETF is said to be trading at a ‘premium’ and if the price is below its iNAV, it is said to be trading at a ‘discount.’ This leads to a higher impact cost. Gold BeES has an impact cost of 0.02 percent (as of July 2024, on the NSE) and is the lowest among Gold ETFs.
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Gold FoF invests predominantly in Gold ETFs only. Investors without demat accounts can consider buying gold FoFs. The good part about gold FoFs is that they allow systematic investment plans (SIPs). ETFs don’t allow SIPs. You can start your SIP in a gold fund with as little as Rs 500 a month. Nippon India Gold Savings Fund invests mainly in Gold BeES.
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