Gold ETF Funds in India Guide – Best and Worst NSE Gold ETF ,Comparison amongst SBI,Reliance,Kotak,HDFC,UTI,Axis,Benchmark and Should you do a Gold ETF SIP

I had written about the best way to invest in gold in India looking at the different ways of buying physical gold and gold etfs.There was also the option of investing in gold mutual fund which invest in gold mining companies as well as looking at whether to buy gold from banks or you were better off buying gold from your neighborhood jeweler.Alll the options of buying gold have their advantages and disadvantages.Gold ETFs have become the fastest growing segment of buying gold in India with most people preferring the convenience and ease of buying gold the demat way.Note only does it have the security and storage advantages,it is also easily salable without a huge transaction costs.Its no wonder that most asset management companies in India have launched gold etf products to take advantage of the growing trend of  buying gold Etfs in India.SBI and UTI,two of the oldest government owned mutual fund houses in the country too have started gold etfs besides the private companies.Benchmark Gold Bees remains the oldest gold etf in the country and is looking to gain marketshare after Goldman Sachs bought the company.IDBI has joined the gold etf party becoming the latest AMC to start a gold ETF.There is little to distinguish these Gold ETFs from each other since they don’t have any active management and are mostly linked to the price of gold.The best gold etf is the one which has the least tracking error and the lowest expense ratio.I don’t have a favorable opinion of the mutual fund etfs in India since they charge very highly and there is lack of variety and liquidity in the Indian ETF market.

Gold ETFs in India Common Characteristics

The common features of gold etfs in India is that a singe unit is 1 gram of gold.Most of the custodians are based out of India and the benchmarking is done against the London price of gold each day.All the ETFs hold 90-100% of their assets in gold bars and 0-10% in debt instruments.The Creation Unit is 1000 units that is if you have 1 kg of gold etf that is about Rs 26 lakhs you can exchange your paper gold into physical gold from the AMC.The expense ratio of the better ETFs in the market like Kotak,Axis and Benchmark is 1% while that of the other bad ones is 1.5-2.5%.Benchmark is the most liquid ETF making it the preferred choice of buying a gold ETF in India.I have not listed out all the 12 gold ETFs in India but the major ones and Quantum because its different since its unit is 1/2 gram of gold.

Disadvantages and Drawbacks of Gold ETF

1) Taxes – You have to pay long term and short term capital gains tax on gold ETFs if you are selling your gold etf and making a profit.

2) Expense Ratio and Management Charges – You have to pay an expense ratio on your gold etf every year to the asset management company which you don’t have to pay in case of physical gold.

3) Counterparty Risk – There is always the danger that the asset management company by some stupid mistake loses your gold investments either through fraud (not a black swan considering corruption in India and mutual fund companies) or through extreme stupidity

4) Tracking Errors – There is always some tracking error between the gold price and the gold etf just as it is there in case of all exchange traded funds.The performance of your gold etf may lag that of the gold price.

5) Liquidity and Impact Cost– There is another danger of liquidity in case the gold etf does not trade in enough volumes.You may lose money in that case and you will also have to pay a big impact cost as the bid and ask spread may be too high.

Advantages of Gold ETF

1. Purchases can be made in small denominations: An investor can purchase gold ETFs in small denominations. For example, one gold ETF unit represents one gram of gold. Therefore, an investor can even buy small amount of units at a time and then accumulate more units over time to shore up his investment.
2. No worries about quality: When buying a gold bar or gold coin, a buyer has to make sure he buys it from a trustworthy source, lest he gets saddled with gold of lesser purity. There have been instances when one has paid for a 24K/10 gram gold coin and has got a 19-20K/10 gram coin. This cannot happen in the case of a Gold ETF as an investor does not need to take physical delivery of the gold.
3. Convenient resale: Since Gold ETFs are traded on the exchange, an investor can buy or sell units easily anytime during market hours. Try comparing this with the headache of selling a gold bar, coin or jewelery. An investor always tends to lose some amount towards making charges in case of jewelery and banks do not buy back gold coins, even when purchased from them.
4. Hassle-free storage: In case of Gold ETFs, there is no hassle of storage as it is in demat form. In case of gold bars, coins or jewelry, one may have to hire a bank locker, which again comes at a considerable cost.
5. Taxation: Physical gold needs to be held for three years or more to be eligible for long-term capital gains. If physical gold is sold before the stipulated period of three years then short-term capital gains tax will be applicable. Comparatively, if Gold ETFs are held for less than a year, then the gains fall under short term capital gains. This means, that gains are clubbed with the overall income of the investor and depending on the tax slab he falls in, taxes will be applicable. Further, if the Gold ETF units are held for over 12 months; then the gains are classified as long term capital gains tax, where the investor will pay either 10% on the gain (profit) without indexation or 20% with indexation, whichever is lower.

Gold ETFs on NSE

Here is a list of Gold ETFs listed and trading on the NSE(National Stock Exchange)

SBI Gold ETF (SBIGets)

The investment objective of the fund is to seek to provide returns that closely correspond to returns provided
by price of gold.For SBI GETS, the price of the Gold is the Benchmark.NAV of SBIMF GETS units would be declared on every business day.the Scheme was opened on March 30, 2009.Creation Unit Size is equal to 1,000 units of SBI GETS.The SBIGets Expense ratio like that of UTI is a crazy 2.5% which makes it a strictly stupid investment.Like other Gold ETFs, the SBIGets has also performed badly giving 1% lower returns than the benchmark.The  Bank of Nova Scotia is the custodian of this fund.

Reliance Gold Exchange Traded Fund

The investment objective is to seek to provide returns that closely correspond to returns provided by price of gold. t has Dividend Payout Option only.Reliance Gold Exchange Traded Fund (RGETF) shall be benchmarked against the price of Gold.All gold bullion held in the scheme’s allocated account with the custodian shall be of fineness (or purity) of 995 parts per 1000 (99.5%) or higher.1 Unit=Approx. 1 gram of gold.The performance of the fund since 2007 has not been good giving 1.5% lower returns than the benchmark.The Trustee has appointed Deutsche Bank as the Custodian.The total expense ratio is 1.5% which is too high given its poor performance and better gold ETFs at 1% expense ratio.The fund used to charge 2.5% before the SEBI stopped the high charging of expenses by mutual funds.

Axis Gold ETF

The Axis Gold ETF started in 2010 under the NSE Symbol AXISGOLD.The AUM of the Fund has crossed Rs 200 crores and the minimum investment is 1 gram of gold which is around Rs 2600 at current prices.The expense ratio of the Axis Gold ETF seems on the higher side.The featurs of this gold etf are also quite standard and nothing out of the extraordinary.The higher expense ratio would make me avoid AXISGOLD

Quantum Gold Fund ETF

The Quantum Gold Fund (QGF) is an Open Ended Fund, which is listed on the National Stock Exchange (NSE)  tracking domestic prices of gold.I.Investments by the fund will be made in physical gold which would be stored by the custodian and also accompany adequate insurance cover.Each unit of the QGF will be approximately equal to price of half (½) gram of Gold.Effective 22^nd February 2008, the expense ratio of the fund is 1.00%. All gold bars held by Quantum Mutual Fund are .995 pure bars certified by LBMA approved gold refiners.The symbols for NSE is  QGOLDHALF and for BSE is QGOLDHALF Performance of Quantum Gold Fund ETF : The ETF has underperformed the benchmark by about 0.5% in 6 months till 29 July and by around 1% in the last 1 year   though over a longer time period it has been 0.2%

UTI Gold Exchange Traded Fund (UTI Gold ETF)

It is an An open-ended Exchange Traded Fund  to provide returns that, before expenses, closely track the
performance and yield of Gold.UTI-Gold Exchange Traded Fund will be benchmarked against the price of gold.The Scheme opened for trading and subscription consequent on listing of units on the NSE with effect from  April 2007.The AMC has estimated that upto 2.50 % of the daily average net assets of the scheme will be charged to the scheme as
expenses.All in all you can safely avoid UTI Gold ETF for its crazily high expense ratio and under performance Performance of UTI Gold Exchange Traded Fund –  The UTI Gold ETF has not done well in the past 1 year or the last 3 years.The Gold ETF has underperformed the benchmark by more than 1% in the last 1 and 3 years according to the prospectus.

HDFC Gold Exchange Traded Fund  ETF (HGETF)

Like others It is an open ended Exchange Traded Fund .The Units of HGETF in other than Creation Unit Size cannot be directly redeemed with the Fund. These Units can be redeemed (sold) on a continuous basis on the NSE and BSE.The Expense Ratio is 1%.The Scheme would invest in gold in the domestic market and intends to track the spot price of gold in the domestic market.The AUM of the Fund was Rs 299 crores at the end of Q2 2011

Kotak Gold ETF (KGEFT)

Kotak Gold ETF is an open-ended gold Exchange Traded Fund. Each unit of KGEFT is approximately equal to 1 gram of gold.KGEFT is backed by physical gold held by the Custodian (Scotia Macotta).The NSE Symbol is KOTAKGOLD and the Creation Unit is 1000 units like the others.The Kotak Gold ETF has under performed its benchmark by about 1% since inception.The expense ratio of KGEFT is 1% like most of the other better Indian gold etfs in the market.

Benchmark or GS Gold BeES

The Benchmark or the newly named Goldman Sachs Gold BeES is the most widely trades gold etf in the Indian market with an expense ratio of 1%.The minium lot size is 1 gram of gold which is the unit size while the Creation Unit is 1000 units or 1 kg of gold.The NSE Symbol is GOLDBEES and the BSE Symbol  is 590095.The AMC managing it is Goldman Sachs Asset Management (India) Private Limited.Performancewise, they all are giving more or less same return.

IDBI Gold ETF

IDBI has become the 12th AMC to launch an open-ended gold exchange traded scheme.It will invest in physical gold with the objective of replicating the performance of gold in domestic prices. The fund’s annual charges will be 1.5 per cent and it will include fund management fees and other charges.IDBI Mutual Fund launched its first scheme in May 2010 and now manages 7 funds, including this one.

Should you do a Gold ETF SIP

Systematic Investment Plans (SIPs) are said to be a good way for investors to put in money in mutual funds as it takes away the element of timing the markets.The SIP way which is putting a fixed amount of money is also being sold by AMCs to invest money in gold.However I don’t think maybe the best way to invest money in Gold.It depends on what you think of Gold as an investment .There are both advantages and disadvantages of investing in Gold.One of the big disadvantages is that it does not provide a cash flow like a bond or a stock.It also many not be suitable as an investment for an old person.Gold whether you like it or not is a doomsday investment asset which guards against systematic shocks.There have been long periods 1980 to 2000 when gold gave a negative return.

It you want to invest in gold you can do so anytime and averaging it out does not make too much sense to me since its more of a trading asset rather than an investment asset the way I see it.Unlike mutual funds or bonds you can’t put too much money into gold.Its more of an insurance against financial system stability and failure of the fiat currencies.However in that case you would have more worries than thinking about asset class returns.Also in that case you would be better off having physical gold rather than papers claiming that you own gold.

Gold ETF India Fund Comparison

Best Gold ETF in India

Benchmark Gold ETF Gold BeEs is the best ETF option amongst the ETFs available in India due to its very low expense ratio of 1% compared to the 2.5% charged by most of the other ETFs.Note Benchmark is the best asset management company in terms of the variety and expense of ETFs.I would recommend Gold BeEs is the preferred investment vehicle of choice for buying Gold in India.Last of all Gold BeEs has the most volume which means it has the least impact cost while buying and selling the Gold ETF.

Worst Gold ETF in India

The worst Gold ETFs are UTI and SBI due to their high expense ratios and poor performance.I don’t know why these AMCs have to charge 1.5-2.5% for a passive thing as buying gold.This is a case of looting of retail investors who don’t ahve enough financial literacy I guess.There is no rhyme or reason for charging so much money for an ETF.The whole purpose of an ETF is to charge less as you are investing passively by following a benchmark.Relaince Gold ETF is also not good because of the higher expense ratio..