Gold ETF: Which is a better investment bet, gold or gold ETFs?

Gold is the most popular metal in India as it considered auspicious and used in various religious ceremonies in India. For centuries, gold has been seen as an investment tool and also purchased for financial safety. India is one of the top countries in the world when it comes to demand for gold. India stands only second to China today in spending of Gold, but it won’t be surprising that India dethrones China in the future to become number one consumer of Gold. In today’s day and age, investing in gold is not limited to buying physical gold ornaments or gold biscuits. You can invest in gold digitally through gold ETF. This article will help you to decide which is a better investment bet, physical gold or gold ETF.

Gold Exchange Trade Fund or Gold ETF

Gold Exchange Trade Fund is a mutual fund scheme that is open-ended and changes as per the fluctuating cost of gold in India. There are no making charges involved in Gold ETF and the income it generates for you, can be monitored on daily basis. Gold ETF can help beat inflation in the long-term and is a much safer bet than equities which are more volatile in the market. A value of one unit of Gold ETF is equal to 1 gram of gold. Gold ETF provides the investor dual benefit of investing in the financial market as per investment in gold. The return on gold ETF is made when the gold prices rise and due to the digital nature of investment, there is no disadvantage with regards to the purity of gold. It remains uniform and is a more transparent financial product throughout the country.

How Gold ETFs work

Buying Gold ETF is like buying actual gold, but in the digital sense. For example – when you buy Gold ETF, the entity that is selling Gold ETF actually buys the gold at the back-end. They also give guarantee about the purity of the gold.  Gold Benchmark Exchange Traded Scheme (Gold BeES) is registered with NSE (National Stock Exchange).  These schemes carefully follow the market trend, the cost of gold trade in India. NSE assigns an authorised body to see over the sale and purchase of gold to create ETFs. The authorising body comprises of notably large companies. Due to the compliance and procedure in place, cost of physical gold and Gold ETF remains identical for the benefit and transparency of the investors.

When to purchase gold in physical form

Industry experts say that it is better to invest in gold mutual funds in India funds scheme unless the gold is needed in physical form for personal use or in an event like marriage. There are many benefits of investment in demat form and the most evident is no chance of theft.  Investment in Gold ETF can be started for as low as INR 1000 a month.

Why to avoid physical gold

Gold ETF give better returns as compared to physical gold purchased, as it does not involve making charges of the jeweller. The funds are also highly liquid and can be redeemed anytime. Physical gold carries many additional expenses on the actual investment which make it difficult to get good returns and defeats the purpose of investment.

As we know now that investment can be done in two different ways, one is a physical purchase of gold and the other is through Gold Exchange Trade Fund. Let’s discuss the details of the difference between the two in the below table:

	Gold (physical gold)	Gold ETFs
Meaning	The investor buys the gold in physical form from a retail store. The purity of gold may not adhere to the standard purity requirement of 99.5%	An open-ended exchange traded funds, Gold ETF invests the money in certified gold bullion (gold purity of 99.5%).  The value of the units allotted to the investor depends on physical gold traded in the market.
Pricing	The cost of physical gold is not standard and it depends from jeweller to jeweller.	Gold ETFs cost is as per international standards and are standard throughout the country.
Affordability	Gold biscuits come in the standard denomination of 10 grams which require a big investment	Gold ETF are much more affordable as the units value start from 1 gram.
Additional charges on investment	When investing in physical gold through ornaments, an investor has to pay 20% to 30% in making charges of the total value of the asset. There are further government taxes levied during billing of the product.	They are comparatively less expense in purchasing Gold ETF. The expense ratio is only 1% every year of the total asset value and brokerage fees is around 0.5% per transaction.
Wealth tax	Investor will have to pay wealth tax of 1% if the cost of the gold possessed by the investor exceeds INR 30 lakhs	There is no wealth tax payable by the investor on Gold ETFs.
Short-term capital gain tax	If the gold is sold by the investors before completion of 3 years, then short term capital gain tax will be applicable as per the prevailing Income Tax rules and regulations.	Short term capital gain clause is the same even for the Gold ETF
Long-term capital gain tax	If the gold is sold by the investor after the completion of 3 years, then long term capital gain will be applicable as per the prevailing Income tax rules and regulations.	The long-term capital gain tax clause is same for Gold ETF as for physical gold.
Liquidity	Physical gold can be purchased through banks and jewellers. It can although only be sold through jewellers. The buying is predominately done offline by going to the jewellery shops.	Gold ETF can be purchased online from a website and the whole process of buying has become simpler with an online platform. It can also be sold easily as it is traded on NSE and BSE. The whole process is regulated and hence, chances of fraud are also less.
Returns calculation	The actual returns are calculated by the current market price of gold minus the purchase price which includes the making charges and tax.	The actual returns are calculated by the current market price of unit of gold ETF minus buying price and commission paid.
Demat account requirement	There is no need for demat account to purchase physical gold	To purchase gold ETF, an investor first needs to open a demat account

Conclusion

If you are purchasing gold for investment, then Gold ETF is the way forward. There is no risk of impurity or thefts as the investment of Gold ETF is in your demat account. The returns on the Gold ETF are also more as there are no hefty making charges involved. Gold ETF also has more transparency and are safe to invest as they are robustly regulated than physical gold transactions. Hence, gold ETF makes for a better bet in today’s world of internet and digitalisation.

Why tax-saving mutual funds are the best way to save on taxes

You can’t grow long term if you can’t eat short term; one can always manage short and long-term goals as independent as it can be. The art lies in balancing both your short and long-term goals successfully.  Many of us plan our retirement and needless to say it’s one thing that isn’t in our list of things. We focus on saving tax every year, but we need to better manage it to achieve our long and short team goal. Tax saving should be done in two parts i.e. first save tax for the year and next, invest in funds for your retirement.

So the next question obviously is, do we have instruments that will help us save tax and plan our future. Yes, we have an equity-linked saving scheme or as we call it ELSS of mutual funds.  In Income Tax Act, under Section 80 C, one can invest up to INR 1.5 lakh for a financial year. One can always invest more than INR 1.5 lakh, but it won’t qualify for tax benefit.  There was a recent announcement that the return generated from ELSS will become taxable with the dividend distribution tax and taxes on the long-term capital gain. In spite of the changes, it’s a good option for young earners who are starting to save for retirement and tax. The benefit of ELSS is short lock-in period and provides the potential for growth via equity.

Understanding Equity Linked Saving Schemes

ELSS is equity diversified mutual fund scheme with a lock-in period of three years from the date of investment. Post completion of the lock-in period, the scheme turns into an open-ended scheme and one can withdraw the fund. It’s better to keep the funds invested considering your long-term goal of retirement. These funds are managed by fund managers who are experienced finance professionals with a better understanding of the benefits of tax saving, plus are offered by fund houses. It’s important to decode why ELSS is a better investment under Section 80 C to save tax.

Types of ELSS

ELSS has two main categories of funds i.e. Dividend and Growth fund.  Dividend Fund is further subdivided to Dividend Payout i.e. you will receive the dividend tax-free and Dividend reinvestment i.e. your investment will be reinvested as a fresh investment. Growth Fund provides long-term wealth creation platform for investors where the full value of the fund is realised at the time of redemption.

How ELSS is better than all other 80C Investments             

ELSS still is considered one of the best options to invest even though the returns are being taxed as per the new guidelines.  Returns attract long-term capital gains from ELSS, but they should still continue to be part of your investment portfolio as per the industry experts. These are equity-based investment instruments that provide the potential of higher returns considering the long-term scenarios. In comparison to other investment options like PPF and ULIPS, post-tax returns are better for ELSS.

Short lock-in period: This is one of the attractive aspects of investing in ELSS in comparison to other tax saving investment option. The lower lock-in period is beneficial to an investor. Whether it is Public Provident Fund, Employee Provident Fund or National Saving Certificate (NSC), all required a minimum lock-in period ranging from five to fifteen year where ELSS stands at a minimum of a three-years.

High Returns on Investment (ROI): We all invest to gain profit, increase our savings and of course, hopes to fulfil our aspirations. Since ELSS is invested in equity markets, the returns are much higher than other investment options.  While we save tax, these profits earned in long run is a better option of investment in Section 80 C with a focus on not too short or mid-range of investment duration. Public Provident Fund provides eight percent returns, while ELSS can generate anything in the range of ten to twelve percent in a period of ten plus years. The returns from NSC and other life insurance schemes are also less than of ELSS.

Flexibility with ELSS:  ULIP’s don’t provide flexibility of ELSS; in case we are not okay with the ELSS fund, one can always moved to another fund since there is no multi-year commitment. With ULIP non-performance, one can move or invest in funds that are offered only that ULIP. It’s true that ULIP can also provide similar returns like that of an ELSS and are sold at a low cost by insurance firms directly.

Benefit of Combining ELSS and PPF: This is a solid combination since together, they cover the stability of PPF and earning a potential of ELSS.  The next advantage is that you combine debt and equity both in your investment portfolio with government-backed security and opportunity of growth through fund house.

 Protection in times of volatility:  Since the lock-in period if of three years, it helps to build a discipline and stay away from fear of changing your fund house too frequently.  In terms of changing market’s, they act as a strong shield to weather the volatility that comes with investing in stock markets. In simple terms, it enjoys the benefits of market high and has provisions to reduce the impact of marker low.

Things to know about ELSS before you invest

Before we even start with our selection of ELSS, tax saving mutual funds, one should know how much to invest, duration and the objective of the investment i.e. is it for saving tax or your retirement or your dream house goals?

Look at your earning, spends and time frame to achieve your goal, inflate the expenses and see how much surplus you have to start investing.

Selecting your ELSS isn’t a simple task since we have multiple options like Large Cap, Mid Cap or Multi-Cap Stocks. It will be good to diversify across on not more than 2 to 3 ELSS with variation in industry and market capitalisation.

It is crucial to consider all facts about the fund and your financial objective before investing. One should keep reviewing the performance of schemes after the lock-in period is completed. Don’t look at funds in isolation, look at its benchmark return with consistency to beat its benchmark and at the category average returns will tell how good or bad is your investment against its peers.  Don’t look at a short-term run; incentivise your long run by balancing your investment goals.

All the Information about Equity Funds

One place where you can always find the definition of money is a dictionary. But one place where you can invest your money for earning a long-term profit is equity mutual funds.  With Equity mutual funds, you will not only find money, but will also have the capacity to spend for yourself and family. To begin, you must be thinking that you definitely know the word equity and mutual funds is where you must invest to save tax every year. So how does these two combine? Hence, let’s start by deep diving on equity mutual funds.

Equity Fund is a mutual fund that invests principally in stocks or shares of companies.

Management of equity mutual funds can be done either actively or passively.

While managing an active fund, the fund manager needs to scan the market, conduct research on companies, scrutinize performance and keeps an eye on the best stock to invest.

For Passive, the fund manager puts together a portfolio which is similar to popular market index i.e. Sensex or Nifty Fifty.

TYPES OF EQUITY FUND

There are many types of Equity funds which can be further categorised based on their investment mandate and the kind of stocks and sectors they invest in.

Equity funds can also be classified as domestic or international which can be broad market, regional or single country funds.

To name a few equity mutual funds, details are mentioned below:

A) Basis Market Capitalisation:

Equity funds are also divided basis market capitalisation i.e. how much the capital market values the equity of an entire company. They limit investments to Micro Cap, Small Cap, and Medium Cap, Large Cap or mega-cap companies.

Large Cap equity funds belong to large-cap companies which are well-established companies and hence, these are reliable plus stable investments.

They primarily invest in large-cap stocks of the biggest listed companies of the economy.

Mid Cap equity funds and Small Cap equity funds belong to midsize and smaller companies respectively. Additionally, one can always invest their funds in both mid cap and small cap naming them as mid-cap & small-cap funds

The returns are fluctuating due to volatility in smaller companies.

 Multi-cap funds are equity funds that invest across market capitalisation which is in large, mid and small cap stocks.

B) Basis Sector and Themes:

Further classification for equity mutual funds is diversified where the scheme invests in stocks across the entire market spectrum or Sectoral /Thematic is restricted to only a particular sector or they say infrastructure or theme.

Sector equity mutual funds particularly invest in one industry i.e. Pharma/FMCG /Technology.

Thematic equity mutual funds are those following a particular theme like emerging consumer companies or international stocks.

Since these are concentrated in particular sector, they tend to be riskier than diversified equity funds.

C) Index Funds

Equity funds that follow a particular index are called index funds which are passively managed funds that invest in the same companies in the exact same proportion that make up the index that fund follows.

For example, a Sensex index fund will have investments in all 30 Sensex companies in the same proportion in which the companies form part of the index. Index funds do not cost much as they don’t require to be managed actively by the fund manager.

Equity fund essentially invests in company shares and aims to provide the benefit of professional management and diversification to ordinary investors.

HOW DO EQUITY FUNDS WORK?

 It’s actually pretty simple; you give your money to a fund which invests in stocks. There will be gain or loss which will accumulate to your account. This is the bare minimum information that one needs to invest in equity mutual fund.

The word mutual in the name exactly means what it indicates, i.e.it is composed of the money that a huge number of people have invested and the way law, rules & regulations have designed is that all investors are exactly equal financially and are treated the same way.

The way this fund is designed is that an equity fund invests 60 percent or more of its assets primarily in equity shares of companies in different proportion as per the investment mandate. This investment might be in any variety of mutual funds i.e. large or sectoral with variation in investing style as value or growth oriented.

After investing a major portion in equity shares, the remainder amount might be invested in debt or money market instruments. This investment will also help in redemption requests raised by the investors.

 The fund/portfolio manager will keep buying or selling particular stocks to take advantage of changes in a dynamic market.

The expense ratio of equity funds changes due to regular buying and selling of equity shares. The current upper limit of the expense ratio is at 2.25% fixed by SEBI for equity funds and they plan to further reduce it. An investor will always look for the equity fund that has low cost as measured by expense ratio, lack of sales overload and has little or no turnover in the underlying portfolio.

WHO SHOULD INVEST IN EQUITY FUNDS?

An important decision that each investor needs to be crystal clear is that to invest in equity mutual fund or stocks direct.

This decision is to be guided by risk appetite along with the length and breadth of your investment portfolio. Ideally speaking, any investor who isn’t looking for relatively short-term isn’t suited for equity mutual fund. Equity mutual fund benefits the most for those who can stay invested for 5 plus years or more.

Another way to decide is by rupee cost averaging into a low-cost equity fund over long periods of time, reinvesting of dividends and then regularly going through up and down of stock market until one retires.

As a salaried employee, one can save tax under Section 80 C of Income Tax Act by investing in ELSS, which are regarded as the most appropriate because of the shortest lock-in period of 3 years and provides higher returns.

If you are starting fresh in the stock market, large-cap equity funds are an appropriate choice since these funds invest in equity shares of the top 100 companies of the stock market and provide stable returns in the long term.

As an experienced investor, you may look at investing in different equity funds who invest in shares of companies across market capitalisation which provide a combination of high return and less risk, as compared to equity funds who invest only in small cap or mid-caps.

BENEFITS OF INVESTING IN EQUITY FUNDS

·         Expert Money Management

·          Low Cost

·          Convenience

·          Diversification

·          Systematic investments

·          Flexibility

·         Liquidity

·          Tax

One of the huge benefits of investing in equity funds is one doesn’t need to worry about choosing the right stock and sectors to invest which, of course, requires a lot of research and study of company financials. On an average, the performance of equity funds in India have generated pre-tax returns in the range of 10 to 12 % which fluctuates as per the economic and market dynamic changes.

Do remember the golden rule that those who have the gold will make the rules and hence, choose wisely to dig your gold on equity mutual funds.

Mutual Fund Industry in India

The mutual fund industry has been around for over 6 decades now in India. Mutual funds were first introduced in the year 1963 with the formation of UTI (Unit Trust of India) with the backing of RBI and Indian Government. Since then, the mutual fund industry has come a long way. It has seen its up and downs but the growth in the mutual fund industry has reached new heights in the last decade. Today the AAUM (Average Assets Under Management) of the mutual fund industry in India stands at over INR 24,31,342 crore.  The industry has seen four and a half fold increase in the span of 10 years from INR 4.83 trillion to INR 22.04 trillion. (All figures are taken from the official website of AMFI 

– Association of Mutual Funds in India)

When the mutual fund industry started in the year 1963, the main objective was to give an opportunity to small-time investors to participate in market-related gains and wealth formation. The history of the mutual fund industry can be bifurcated into six different phases.

Phase I (1964-87): Growth Of UTI:

In the year 1963, through the act of parliament, UTI was established. UTI had a monopoly as it was the only entity that was offering mutual funds. Initially, UTI was started by RBI but later it was delinked from it. The first mutual fund scheme was launched in 1964. During the period in the 70’s and 80’s UTI started offering schemes that would suit investors of all classes.

Phase II (1987-93): Entry of Public Sector Funds:

In the year 1987, many public sector mutual funds made an entry in the market. Many public sector banks and institutions were allowed to launch mutual funds. On Nov 1987, SBI became the first bank to launch the first non-UTI mutual fund in India. This was followed by other public sector banks like PNB and Canara. The AIM increased from INR 6700 crores to nearly INR 47000 crores from the year 1987 to 1993. During this period, a lot of investors had gained confidence in best mutual funds and were investing in larger amounts.

Phase III (1993-96): Emergence of Private Funds:

In the year 1993, the private sector got the nod to establish mutual funds. This was a breakthrough moment in the mutual fund industry as the investor had a broader choice of options and there was healthy competition between the public and private sector funds. This also allowed foreign companies to make an entry in the Indian mutual fund industry but through a joint venture with Indian promoters. Through the private sector, new product innovation and investment management techniques were introduced in the mutual fund industry.

Phase IV (1996-99): Growth And SEBI Regulation:

With the private sector and foreign players entering the mutual fund industry, it witnessed a tremendous growth in the industry. Indian economy had become more liberal which helped introduce more competition and thrust to the growth of the mutual fund industry. The increasing growth of the mutual fund industry beckoned introduction of regulation and this is when SEBI (Security Exchange Board of India) regulations come into existence. During the budget of 1999, a big step of exempting all mutual fund dividends from income tax in the hands of investors was taken. It was also during this time AMFI launched awareness programme in the interest of the investors.

Phase V (1999-2004): Beginning of a Large and Uniform Industry:

From the year 1999, a beginning of a modern economic phase of the mutual fund industry has emerged in terms of growth. In 2003, UTI act was updated and UTI no longer had special legal status and it adopted the same structure of trust and AMC as any other mutual fund. UTI comes under SEBI guidelines like any other mutual fund in India. The uniformity in the mutual fund industry made it easy for investors and distributors. During 1999 and 2005, the size of AUM saw a growth from INR 68000 crore to INR 1,50,000 crore.

Phase VI (From 2004 Onwards): Consolidation and Growth:

Since 2004, mutual fund industry has grown from strength to strength. The merger between big mutual fund houses and more international players continue to enter the Indian mutual fund industry. The mutual fund has also seen a surge in investments due to the introduction of technology for ease of making investments and available investment tools like mutual fund calculators. There are various categories and types of mutual funds available in the market today.

ADVANTAGES OF MUTUAL FUNDS:

Diversification feature in the mutual fund mitigates the risk and improves the overall returns for the investor.

Mutual fund transaction cost is spread over a large pool of investors and hence, it comes down to nominal rates for the individual investor.

There are many options of different types of mutual fund schemes available in the market like equity, money market, balanced and hybrid. An investor can choose the best mutual fund scheme as per his/her investment objectives.

Types of Mutual funds are professionally managed by a fund manager and its team. It saves time and effort on part of investor and results in high returns than other investment types.

Mutual fund schemes offer flexibility and affordability in investment through SIP (Systematic Investment Scheme).

Mutual fund investments are easy to liquidate as trading of mutual fund units are done on regular basis.

Dividend returns on mutual funds are tax-free in the hands of the investor. This enhances the returns value of the mutual funds than other investments.

Mutual fund operations are well regulated and come under the guidelines of SEBI which regularly overlooks the operations of mutual fund houses.

STRUCTURE OF MUTUAL FUNDS IN INDIA:

The mutual fund operates through 4 tier structure of Sponsor, an asset management company, Board of Trustees, and a custodian.

Sponsor:

Sponsor is responsible for establishing the mutual fund. It may be an individual or corporate body. The sponsor of the mutual fund needs to compulsorily contribute at least 40% of the net worth of the AMC.

Board of Trustees:

The mutual fund house needs to have an independent board of trustees. The two-thirds of the trustees need to be totally independent and not associated with the Sponsor of the mutual fund. Trustees are responsible to protect the interest of the unit holders or investors of the mutual fund.

Asset Management Company:

The asset management company looks after the investing and administrative functions of the mutual fund. They have fund manager and analyst team of look after the daily trading of the investments. AMC charges a fee on the mutual fund for the services offered which is also known as an expense ratio of the fund.

Custodian:

As per the SEBI guidelines, the portfolio securities need to be guarded by a qualified bank custodian. The mutual fund house is required to have a registered custodian for their mutual fund securities.