Investing in Gold: Options Amid Mutual Fund Restrictions

Let’s look at the available options.

1. What has changed in Gold Mutual Fund investments?

Several Mutual Fund houses have temporarily restricted fresh investments in their Gold Fund of Funds (FoFs).

The restrictions generally cover:

• Fresh lumpsum investments.
• Registration of new SIPs.
• Fresh switch-ins and certain STP registrations.

However, existing SIP instalments generally continue as scheduled. Redemptions from existing investments are also permitted.

It is important to understand that these restrictions are primarily applicable to Gold FoFs and should not be confused with a blanket restriction on Gold ETFs.

Investors should check the latest communication issued by their respective Mutual Fund houses, as the restrictions and applicable conditions may differ.

2. What are the alternatives for Indian resident investors?

One of the available alternatives is to invest directly in Gold Exchange Traded Funds (Gold ETFs).

Gold ETFs are Mutual Fund schemes that invest in physical Gold of prescribed purity and track domestic Gold prices. They are listed on stock exchanges and can be purchased or sold through a Demat and trading account.

Some examples include:

• Nippon India ETF Gold BeES (GOLDBEES)
• Zerodha Gold ETF (GOLDCASE)
• HDFC Gold ETF (HDFCGOLD)
• SBI Gold ETF
• ICICI Prudential Gold ETF

Unlike Gold FoFs, Gold ETFs can be purchased directly on the stock exchange, subject to the availability of units and applicable trading restrictions.

An important precaution before buying Gold ETFs

There is one important aspect investors should be mindful of while purchasing Gold ETFs: the difference between the market price and the iNAV.

iNAV stands for Indicative Net Asset Value. It represents the indicative underlying value of each ETF unit.

Since Gold ETFs are traded on the stock exchange, their market price is determined by demand and supply. At times, the market price can be significantly higher or lower than the underlying indicative value.

For example:

In this example, an investor is paying ₹105 for an ETF unit whose indicative underlying value is ₹100.

This effectively means paying a 5% premium over its indicative value.

It is advisable to avoid purchasing an ETF when it trades at a significant premium to its iNAV. Investors should also check the bid-ask spread and liquidity before placing an order.

How can you check the iNAV?

You can visit the NSE website and search for the respective Gold ETF under the Exchange Traded Funds section.

The NSE website provides information on the market price as well as the iNAV, helping investors compare the two before placing an order.

Website: https://www.nseindia.com/market-data/exchange-traded-funds-etf

3. What are the options for NRI investors?

For Non-Resident Indians (NRIs), the available investment options can be different depending on their country of residence, tax residency and the investment platform they use. NRIs may also explore internationally listed Gold-backed instruments.

Two examples are:

iShares Physical Gold ETC

This is a physically backed Gold Exchange Traded Commodity (ETC) issued by iShares Physical Metals plc and domiciled in Ireland. It is designed to track the price of physical Gold.

SPDR Gold MiniShares Trust (GLDM)

This is a US-listed Gold investment trust that seeks to reflect the performance of Gold bullion, after accounting for expenses. It is structured as a grantor trust for US federal income tax purposes.

Both instruments provide exposure to Gold without requiring investors to purchase or store physical Gold themselves.

NRIs should evaluate these options based on their country of tax residency, applicable tax treaties, local investment regulations and the tax treatment in India, wherever applicable.

The fact that an instrument is listed internationally does not automatically make it tax-efficient for every NRI.

4. Gold ETF vs Gold Mutual Fund: Understanding the tax implications

Taxation is another important consideration when choosing between a Gold ETF and a Gold Mutual Fund.

Under the current Indian tax framework, the holding period required to qualify for long-term capital gains taxation differs between the two.

The broad tax treatment for investments covered by the current provisions is as follows:

The above rates are before applicable surcharge and cess.

The difference arises primarily because Gold ETFs are listed securities, whereas Gold FoFs are generally unlisted Mutual Fund units.

For example, consider an investor who sells their investment after 18 months:

• In the case of a Gold ETF, the investment qualifies as a long-term capital asset and the gain is generally taxed at 12.5%.
• In the case of a Gold FoF, the investment is still classified as a short-term capital asset and the gain is taxed at the investor’s applicable slab rate.

This difference can be relevant when deciding between the two investment routes.

5. A final thought: Focus on suitability, not just availability

Gold can have a role in an investor’s overall asset allocation. However, the allocation should be determined by the investor’s financial goals, investment horizon and risk profile.

The recent restrictions on fresh Gold FoF investments do not mean that investors need to rush into Gold ETFs or internationally listed Gold instruments.

There are alternatives available, but the suitability of each alternative needs to be evaluated before making an investment decision.

Remember, the objective is not simply to invest in Gold. It is to understand why Gold has a place in your portfolio and choose the right way to invest in it.

Disclaimer

This article is intended solely for investor education and general informational purposes. It should not be construed as investment advice or a recommendation to buy, sell or hold any security or financial product. The examples and instruments mentioned are for illustrative purposes only.

Tax provisions and their applicability may change. Tax treatment depends on individual circumstances, residential status and applicable laws. Investors should consult a qualified tax professional before making investment decisions.

Bachhat is a SEBI Registered Investment Adviser. Registration granted by SEBI, enlistment with IAASB and certification from NISM in no way guarantee performance of the Investment Adviser or provide any assurance of returns to investors.

Mutual Fund investments are subject to market risks. Read all scheme-related documents carefully.