Budget 2024: Gold ETFs Gain Favor Over Gold Mutual Funds

The Union Budget 2024 has introduced changes that make Gold Exchange-Traded Funds (ETFs) more attractive compared to Gold Mutual Funds. Under the new tax regime, profits from Gold ETFs held for over a year will be taxed at a long-term capital gains rate of 12.5%. Previously, gains were taxed according to individual slab rates regardless of the holding period. This change positions Gold ETFs as a more tax-efficient investment option starting April 1, 2025.

Gold ETFs, such as Nippon India ETF Gold BeES (Gold BeES), are passive mutual funds that invest in standard gold bullion of 99.5% purity and closely track domestic gold prices. In contrast, Gold Mutual Funds are fund-of-funds (FoFs) that invest primarily in gold ETFs. Currently, there are 17 Gold ETFs available, with Gold BeES standing out due to its high liquidity and low tracking error.

Customs Duty Reduction

Another significant development from the Budget is the reduction in customs duty on gold and silver from 10% to 6%, and the cut in Agriculture Infrastructure & Development Cess (AIDC) from 5% to 1%. This reduces the overall tax burden on gold from approximately 18.5% to 9%. According to Chirag Mehta, CIO at Quantum AMC, this reduction could lower gold prices, potentially benefiting new investors by providing an opportunity to buy gold at reduced rates, although it may affect returns for existing holders.

Gold ETFs vs. Gold Mutual Funds

Gold ETFs are now more appealing due to the new tax benefits and the reduction in customs duties. Arun Sundaresan, Head of ETFs at Nippon Life India AMC, highlights that Gold ETFs will now offer long-term capital gains tax benefits if held for 12 months, compared to the two-year holding period required for Gold Mutual Funds to achieve the same benefit.

Investment Considerations

Gold ETFs offer the advantages of high liquidity, low tracking error, and ease of trading on exchanges like NSE and BSE. Gold BeES, a notable choice, is recognized for its superior liquidity and minimal tracking error. The average daily trading volume of Gold BeES on NSE was Rs 31 crore over the past year, indicating robust market activity.

Investors should consider factors such as the size of the ETF, liquidity, tracking error, and impact cost when selecting a Gold ETF. Gold BeES scores well in all these aspects, making it a strong contender for those interested in gold investments.

Gold as an Asset Class

Gold has demonstrated strong performance in recent years, with gold ETFs achieving a compounded annualized return of 13% over the past year. While gold is a solid hedge against market uncertainties and a useful portfolio diversifier, it should constitute 5-10% of your portfolio. Key factors influencing gold prices include central bank purchases, geopolitical risks, and economic conditions. Although gold may not always be the top-performing asset, it provides valuable diversification.

For investors without a demat account, Gold Mutual Funds offer an alternative, allowing investments through systematic investment plans (SIPs) with as little as Rs 500 per month. Nippon India Gold Savings Fund, for instance, primarily invests in Gold BeES.

Conclusion

With the recent budgetary changes, Gold ETFs like Gold BeES have gained a competitive edge over Gold Mutual Funds. They offer attractive tax benefits, lower customs duties, and robust liquidity, making them a compelling option for investors looking to invest in gold.

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