FINOLOGY

Gold ETF
2025
 Nov’24

Should you have gold as a part of your portfolio?

Gold is often considered a good investment for the purpose of diversification. It is

viewed as a hedge against inflation and is expected to safeguard against down-
turns in stock markets.

But to check whether expectations meet reality… we went on to study whether

investing in gold is really worth it. The website Prime Investor conducted a study in
which they ran a rolling returns analysis on equities (taking the NIFTY 100 Index as
a proxy) and gold (taking Indian gold prices from the ICRA database as a proxy)
using historical data from January 2003 to April 2024.

The key insights observed from the study:

The study revealed that as the investor went from a 0% gold allocation to a 40%
allocation, the portfolios' average rolling returns improved from 12.1% to 13.4%
over the long term. This is probably because gold performed when equity
returns were poor.

A gold allocation improved the investor's odds of beating inflation (more than
6% return). But this benefit topped out at a gold allocation of 20%.

Contrary to perception, allocating gold to the pure equity portfolio lead to more
volatile portfolio returns. When considering risk-adjusted returns, allocating 10%
to 20% to the portfolio was the best fit.

So, having 10%-20% of your portfolio investments in gold can provide diversifica-
tion benefits and a good hedge against inflation.

We consider investors should have some investments in gold as well as a part of

their portfolio.

How to invest in Gold?

One can invest in gold funds through any of the following gold investment meth-
odologies- Physical Gold, Gold ETFs, Gold Mutual Funds, Sovereign Gold Bonds
(SGBs) and Digital Gold. We decided to compare these investment venues and
pick the best way to invest among them. In comparing, we observed the following
things:
 Nov’24

Particular Physical Gold Gold Mutual Gold ETFs Sovereign Gold Digital Gold
Funds Bonds

Key Risks Theft, Purity Market risk Market risk Risk of sover- Lack of regula-
Issues, Loss related to the related to the eign default by tory oversight
during manu- volatility of gold volatility of gold the Govern- (high risk)
facturing (High prices (High prices(High ment of India
Risk) risk) Risk) (Low Risk)

Key Costs Design/Making Total costs of Total costs of No visible GST (3% of
(approx) Charges (10%), 0.6% to 1.20% 0.5% to 1% expenses purchase price)
Insurance/Stor- annually, which annually, inclu- and Spread
age charges include: 0.5% to sive of Expense (ranging from
(3% to 4% 1% as Gold ETFs Ratio, Demat 2%-6%)
annually)GST + (0.1% to 0.2% Account
(3% of pur- for managing Charges and
chase price) the Gold) Brokerage

Investment Online/Offline Online/Offline Online/Offline The RBI releases Online/Offline

Option them periodi-
cally, usually at
intervals of 1-2
months, and
the buying
window is open
for 5 days at a
time. It can also
be bought from
secondary
markets.

Liquidity High Liquidity High Liquidity Liquidity varies Less liquidity, High Liquidity
based on the have a 5-year
trading volumes lock-in period
of the ETF.

Taxation LTCG is applica- LTCG is 12.5% on LTCG is 12.5% on There is no Same as Physi-
ble at 12.5%, and profits after sale profits after capital gains cal Gold
a 4% cess on if the holding sale if the tax if held until
LTCG if sold after period is over 12 holding period maturity (8
24 months. If months. If sold is over 12 years) or
sold within 24 within 12 months. If sold redeemed early
months, STCG months, STCG within 12 (after 5 years).
will be applica- will be applica- months, STCG A 12.5% LTCG tax
ble as per the ble on the profits will be applica- applies if sold
slab rates. as per the slab ble on the after 12 months.
rates. profits as per Sales within 12
months are
taxed as per the
individual's tax
slab.
 Nov’24

Which investment option is the best for gold investment?

For investment purposes, we do not consider physical gold, digital gold and gold
mutual funds as an ideal choice for the following reasons:

Physical Gold: Holding physical gold is expensive, and investors are also
responsible for protecting it from theft, etc.

Gold Mutual Funds: Gold mutual funds have higher total costs than gold ETFs.
Moreover, most gold mutual funds invest in their own gold ETFs. So, it is better to
invest in a fund house's ETFs than its gold mutual fund.

Digital Gold: The higher costs for holding digital gold and the lack of regulation
implies no standardised reporting or grievance redressal which puts one’s
investment amount at significant risk.

Now, we were left with 2 modes of investment - SGB and Gold ETFs. Our top pick
remains SGB over Gold ETFs due to the following reasons:

Low holding costs: SGBs don’t have any recurring costs of owning. Gold ETFs on
the other hand, have annual charges, including brokerage and expense ratio
ranging from 0.50 – 1.00%.

Low risks: SGBs are one of the safest way to Gold invest in gold as they are
issued by the Reserve Bank of India on behalf of the Government of India with an
assured interest of 2.50% per annum.

Tax Advantage: The capital gains tax advantage of SGBs wherein there is no
capital gains tax If held until maturity (8 years) or redeemed early (after 5 years)
makes them a better investment option than Gold ETFs. However, the 2.5% inter-
est amount is taxable as per individual’s tax slabs.

However, Gold ETFs are also an important investment option to consider for the
following reasons:

SGB's uncertain future: There is uncertainty currently about the future of SGBs.
The Government of India may discontinue the sale of Sovereign Gold Bonds
(SGB) as they are considered expensive and complex instruments. The recent
Union budget highlighted that the government owes ₹85,000 crore to investors,
which is almost nine times the ₹10,000 crore it owed at the end of March 2020. 6
of these tranches have fully matured, and money has been sent back to inves-
tors for 5 of these as of 18 November 2024.

Since 2015, 67 tranches of SGBs have come and the lowest number of traches
had come in 2018 and in 2023 (4 tranches each). However, till now in 2024, only 1
tranche of SGB has been issued, that to in February. This has created a concern
in the minds of investors that the government may likely discontinue the sale of
SGBs in the future.
 Nov’24

Flexibility: Gold ETFs offer greater flexibility to investors regarding buying and
selling. Investors can buy Gold ETFs directly from secondary markets, and there
are no restrictions on this. SGBs, on the other hand, have an annual investment
limit of 4 kgs for individual investors.

So, this year we decided to pick a Gold ETF.

Our top choice for Gold ETF?

We did a screening exercise on 17 Gold ETFs to pick the best of the lot:

Step1: In the beginning, we focused on gold ETFs with a reliable 10-year

long-term performance record. 6 funds were eliminated in this step.

Step 2: We sorted the remaining funds by the size of their net assets and filtered
out funds with more than ₹1,000 Cr. net assets under management. 4 funds
were eliminated, and we now had 7 funds remaining.

Step 3: We further filtered the 7 funds with an expense ratio lower than the aver-
age expense ratio of 0.62% of the remaining funds.

Step 4: Finally, we arrived at our top 4 funds, which had an expense ratio lower
than 0.59%. Our top 4 funds were:

ICICI Prudential Gold ETF

Kotak Gold ETF

HDFC Gold ETF

UTI Gold ETF

Step 5: We checked the tracking error of these funds and picked the fund with
the lowest tracking error.
 Nov’24

ICICI Prudential Gold ETF

Gold-ETF | Regular Plan

This fund helps investors potentially achieve diversification benefits. This fund
focuses on closely tracking the performance of domestic prices of gold derived
from LBMA AM (London Bullion Market Association) fixing prices.

Rolling Returns
Returns as on
31-Oct-2024
1 year 3 years 5 years

ICICI Prudential
Gold ETF
28.86% 16.89% 13.50%

Benchmark 30.12% 17.85% 14.46%

Details of Plan

AUM (as of Oct 2024) ₹4,226.83 Cr.

Launch Date: 24 August 2010

Expense Ratio: 0.50%

Tracking Error: 0.22%

Why do we like this fund?

This fund has a large size AUM and provides good liquidity. The low tracking error enables
the fund to generate returns close to its benchmark.
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