Gold ETFs - A must in every portfolio
Exchange Traded Funds (ETFs) are the mutual fund units which investor buy or sell from the stock exchange, as against a normal mutual fund unit, where the investor trades through a distributor or directly from the asset management company (AMC). ETFs are listed and traded on stock exchanges.
Various types of ETFs, like Index ETF, Commodity ETF and Fixed Income ETF and Gold ETFs are available in India. Today, Gold ETFs are very popular in India, and hence we should see if it makes sense to invest in these instruments.
Investing in stock markets is turning out to be a risky affair, as it is always surrounded by global uncertainties. Hence, the yellow metal's shine is only becoming more attractive and a perfect hedge against rising inflation. Investment in gold can either be through purchase of physical gold or through Gold ETFs, which are special types of ETFs which invest in gold and gold related securities.
Gold ETFs provide investors the route of participation in the bullion market without the necessicity of taking physical delivery of gold. The units of these ETFs can be bought or sold at the stock exchange where it is listed on a real-time basis. Investing in physical gold requires large amounts of money, whereas Gold ETFs allow investments in small denominations through Systematic Investment Plans (SIPs).
Prices of gold ETFs move han d on hand with that of physical gold. When the price of gold moves up, the value of ETFs appreciates and vice versa.
Gold ETFs vs physical gold
l Quantity to buy/sell - Physical gold is available in standard denomination, which requires large investments. However, Gold ETFs are available in small quantities, hence are more affordable.
l Mode of storage - As physical gold is normally available in bars they need to be stored in lockers or safety vaults, whereas, as Gold ETFs are available in dematerialised form, they can be stored electronically. Hence, they also eliminate the risk of theft.
l Convenience in buying and selling Physical gold needs to be moved physically from one place to another, while It is not so in case of gold ETFs as they are held electronically.
l Pricing - Gold prices are never uniform, and differ from one jeweller to other. However, the pricing of gold ETFs is done as per international standards and is always transparent.
l Purity - Physical gold always comes with a question of purity in mind, which is not the case with Gold ETFs as the fund house ensures the quality of the same.
l Charges involved - Other than the charges for delivery, no other charges are involved in case of physical gold. However, Gold ETFs have ETF management fee as well as brokerage charges associated with each transaction.
l Taxation - Wealth tax is levied on physical gold, whereas, this is not applicable in case of Gold ETFs. Long-term capital gains are involved after holding the same beyond three years. However, as Gold ETFs are treated like other stocks, long term capital gains are levied after holding the same beyond one year.
Presence in India
With global uncertainties and fall in the domestic price of the yellow metal, month-end assets under management (AUM) of Gold ETFs witnessed a sharp rise. With 44 mutual fund companies in India, only 14 of them have come up with Gold ETFs - Benchmark Mutual Fund (now Goldman Sachs Mutual Fund) was the first to start a Gold ETF in March 2007. The scheme name was Benchmark Gold BeES (now known as GSGold BeES).
A fall of 7.87% in the AUM was witnessed on a month-on- month (M-o-M)basis, from Rs. 6,96,738 crore in August 2011 to Rs. 6,41,937 crore in September 2011. The fall was observed across all the categories except Gold ETFs.
The AUM of Gold ETFs increased from Rs. 7,578 crore in August 2011 to Rs. 8,173 crore in September 2011. A rise of 7.85% in the AUM under Gold ETFs was witnessed despite a fall of 3% in the price of gold domestic markets. On a Y-o-Y basis a significant rise of 186.87% was observed in this category, from Rs 2,849 crore in September 2010, despite a fall of 2.34% in the total AUM of the Indian mutual fund industry. Launch of various Gold ETFs and fund of funds (FoFs) and global volatility, which led the investors to invest in the safest havens during the period under consideration are some of the reasons for the increase in the AUM.
Performance of schemes
In the one year time frame, all the Gold ETFs schemes have generated a return in the range of 32.62% to 33.76%. UTI Gold ETF generated the highest returns amongst the remaining 11 schemes. As none of the schemes have completed a life span of five years, UTI Gold ETF, continued generate maximum returns (27.16%) over a period of four years.
However, on the basis of returns since inception, HDFC Gold ETF stands at the top with returns of 36.34%. This scheme has also outperformed its benchmark, i.e. the price of gold in the domestic market, with a return of 34.77%. On a year-to-date (YTD) basis, returns across all the schemes have been in the range of 24.10% to 24.93%, Kotak Gold ETF being at the top. Benchmark Gold BeES (now known as Goldman Sachs Gold BeES), the first Gold ETF scheme in India, has since inception provided a return of 23.68%.
Amongst all the other mutual fund categories, Gold ETFs have outperformed in the time frame of one year, three years, five years and since inception. This category has also outperformed the benchmark index, BSE Sensex and S&P Nifty, which represents the overall market.
However, in spite of being very close to the returns generated by physical gold, it could not outperform this index. Over the time frame of three years, Gold FoFs have also performed well.
With unexpected fluctuations in the market, investors are always keen to park their portfolios in safe havens. Hence, Gold ETFs turn out to be a good investment option for investors to hedge their assets against the uncertain global market scenario.
ETFs, underlying the shinning yellow metal, have outperformed all other mutual fund categories under various time horizons. This can also be viewed from the fact that 78.42% of the ETF turnover under the National Stock Exchange (NSE), is governed by the Gold ETFs (Source: NSE ETF Report). Thus the various benefits mentioned above, coupled with satisfying the need of small and medium investors to invest and accumulate gold units through SIPs has made Gold ETFs more and more attractive.
Exchange Traded Funds (ETFs) are the mutual fund units which investor buy or sell from the stock exchange, as against a normal mutual fund unit, where the investor trades through a distributor or directly from the asset management company (AMC). ETFs are listed and traded on stock exchanges.
Various types of ETFs, like Index ETF, Commodity ETF and Fixed Income ETF and Gold ETFs are available in India. Today, Gold ETFs are very popular in India, and hence we should see if it makes sense to invest in these instruments.
Investing in stock markets is turning out to be a risky affair, as it is always surrounded by global uncertainties. Hence, the yellow metal's shine is only becoming more attractive and a perfect hedge against rising inflation. Investment in gold can either be through purchase of physical gold or through Gold ETFs, which are special types of ETFs which invest in gold and gold related securities.
Gold ETFs provide investors the route of participation in the bullion market without the necessicity of taking physical delivery of gold. The units of these ETFs can be bought or sold at the stock exchange where it is listed on a real-time basis. Investing in physical gold requires large amounts of money, whereas Gold ETFs allow investments in small denominations through Systematic Investment Plans (SIPs).
Prices of gold ETFs move han d on hand with that of physical gold. When the price of gold moves up, the value of ETFs appreciates and vice versa.
Gold ETFs vs physical gold
l Quantity to buy/sell - Physical gold is available in standard denomination, which requires large investments. However, Gold ETFs are available in small quantities, hence are more affordable.
l Mode of storage - As physical gold is normally available in bars they need to be stored in lockers or safety vaults, whereas, as Gold ETFs are available in dematerialised form, they can be stored electronically. Hence, they also eliminate the risk of theft.
l Convenience in buying and selling Physical gold needs to be moved physically from one place to another, while It is not so in case of gold ETFs as they are held electronically.
l Pricing - Gold prices are never uniform, and differ from one jeweller to other. However, the pricing of gold ETFs is done as per international standards and is always transparent.
l Purity - Physical gold always comes with a question of purity in mind, which is not the case with Gold ETFs as the fund house ensures the quality of the same.
l Charges involved - Other than the charges for delivery, no other charges are involved in case of physical gold. However, Gold ETFs have ETF management fee as well as brokerage charges associated with each transaction.
l Taxation - Wealth tax is levied on physical gold, whereas, this is not applicable in case of Gold ETFs. Long-term capital gains are involved after holding the same beyond three years. However, as Gold ETFs are treated like other stocks, long term capital gains are levied after holding the same beyond one year.
Presence in India
With global uncertainties and fall in the domestic price of the yellow metal, month-end assets under management (AUM) of Gold ETFs witnessed a sharp rise. With 44 mutual fund companies in India, only 14 of them have come up with Gold ETFs - Benchmark Mutual Fund (now Goldman Sachs Mutual Fund) was the first to start a Gold ETF in March 2007. The scheme name was Benchmark Gold BeES (now known as GSGold BeES).
A fall of 7.87% in the AUM was witnessed on a month-on- month (M-o-M)basis, from Rs. 6,96,738 crore in August 2011 to Rs. 6,41,937 crore in September 2011. The fall was observed across all the categories except Gold ETFs.
The AUM of Gold ETFs increased from Rs. 7,578 crore in August 2011 to Rs. 8,173 crore in September 2011. A rise of 7.85% in the AUM under Gold ETFs was witnessed despite a fall of 3% in the price of gold domestic markets. On a Y-o-Y basis a significant rise of 186.87% was observed in this category, from Rs 2,849 crore in September 2010, despite a fall of 2.34% in the total AUM of the Indian mutual fund industry. Launch of various Gold ETFs and fund of funds (FoFs) and global volatility, which led the investors to invest in the safest havens during the period under consideration are some of the reasons for the increase in the AUM.
Performance of schemes
In the one year time frame, all the Gold ETFs schemes have generated a return in the range of 32.62% to 33.76%. UTI Gold ETF generated the highest returns amongst the remaining 11 schemes. As none of the schemes have completed a life span of five years, UTI Gold ETF, continued generate maximum returns (27.16%) over a period of four years.
However, on the basis of returns since inception, HDFC Gold ETF stands at the top with returns of 36.34%. This scheme has also outperformed its benchmark, i.e. the price of gold in the domestic market, with a return of 34.77%. On a year-to-date (YTD) basis, returns across all the schemes have been in the range of 24.10% to 24.93%, Kotak Gold ETF being at the top. Benchmark Gold BeES (now known as Goldman Sachs Gold BeES), the first Gold ETF scheme in India, has since inception provided a return of 23.68%.
Amongst all the other mutual fund categories, Gold ETFs have outperformed in the time frame of one year, three years, five years and since inception. This category has also outperformed the benchmark index, BSE Sensex and S&P Nifty, which represents the overall market.
However, in spite of being very close to the returns generated by physical gold, it could not outperform this index. Over the time frame of three years, Gold FoFs have also performed well.
With unexpected fluctuations in the market, investors are always keen to park their portfolios in safe havens. Hence, Gold ETFs turn out to be a good investment option for investors to hedge their assets against the uncertain global market scenario.
ETFs, underlying the shinning yellow metal, have outperformed all other mutual fund categories under various time horizons. This can also be viewed from the fact that 78.42% of the ETF turnover under the National Stock Exchange (NSE), is governed by the Gold ETFs (Source: NSE ETF Report). Thus the various benefits mentioned above, coupled with satisfying the need of small and medium investors to invest and accumulate gold units through SIPs has made Gold ETFs more and more attractive.
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