This gold ETF scores on impact costs and volumes

Gold as an asset class, has been once again on limelight in the recent periods. Gold’s safe haven status makes it a preferred choice during market and economic uncertainties.

Gold delivers healthy returns usually when equity markets are weak. The gains made in the yellow metal’s prices during market corrections of 2011, 2016 and 2020 are examples. Given its low correlation with equity and other assets, gold can be a good portfolio diversifier, too. You can hold 5-10 percent of your portfolio in gold 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 investing in the standard gold bullion with 99.5% purity. They track the domestic price of gold closely. They are traded on the NSE and BSE just like equity shares are. Investors can buy and sell them at any time during the market hours, using their demat account. In our MC30, we recommend Nippon India ETF Gold BeES (Gold BeES) under gold ETF category.

While selecting a gold ETF, you have to consider asset size, liquidity, tracking error (TE), expense ratio, impact cost and premium or discount of the spot price to its NAV, which will determine the suitability of the ETF to your portfolio. 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 ₹21 crore, the highest among the gold ETFs.

In India, most ETFs are thinly 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 the trading hours, the spot price of the 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 higher impact cost. Gold BeES has an impact cost of 0.03 percent (as of July, on the NSE) and is the lowest among gold ETFs.

Investors without demat accounts can consider buying gold fund of funds (FoFs). Gold FoF invest predominantly in gold ETFs only. 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.

Gold ETFs and Gold FoF are having similar tax implications. Redemption of gold ETFs will attract a long-term capital gains tax of 20 percent (for a holding period of more than 36 months). But if you sell these ETFs before 36 months, then you have to pay short-term capital gains tax at your slab rate.