Price fall, tax changes make Gold ETFs attractive; more so as SGBs seen on hold

Mumbai : A dip in gold prices due to customs duty cut, long-term tax efficiency post the budget announcement, and the likely withdrawal of new issuances of sovereign gold bonds (SGB) are pushing investors to gold exchange-traded funds (ETF) or gold funds. Financial planners believe that investors should have at least a 10% allocation to gold, and say that the latest fall in prices presents an opportunity for those who do not have an exposure to gold to buy.

Post the announcement of a cut in customs duty by the government in the recent budget, domestic gold prices fell by 6% to ₹69,100 per 10 grams. Over the last one year, gold has returned 21.10%.

“For investors who are yet to allocate to gold, this fall provides an opportunity to allocate at much lower gold prices due to the reduction in duties,” says Chirag Mehta, chief investment officer, Quantum Mutual Fund. Another advantage from the budget announcement is the reduction in longterm tax incidence which changes from being at investor’s tax slab to 12.5% after a holding period of two years. “This is a significant advantage from a tax perspective and should stand at an advantage for investors in addition to other benefits that Gold ETFs provide,” adds Mehta.

Analysts believe gold helps diversify portfolio, acts as a hedge against inflation and hence investors should hold 5-10% of it in their portfolios.

“The market uncertainty due to US elections and Fed policy stance are supporting factors for gold where we may see inflows coming to gold funds. A rate cut scenario may boost investment into gold funds,” says Tapan Patel, fund manager at Tata Asset Management.Analysts also believe the strong economic stimulus from China may also boost investment demand for Gold.Till now wealth managers preferred sovereign gold bonds, as the government paid 2.5% additional interest every year, there was no expense ratio, and capital gains were tax free on maturity. However, the last primary issue of sovereign gold bonds was in March 2024, and there has been no announcement on fresh issues this year, while the existing series of these bonds trade at a 10-12% premium in secondary markets. “There is no clarity on whether there will be any fresh issue of sovereign gold bonds.

Investors looking to add gold would be better off buying gold ETF or gold mutual fund,” says Nikhil Gupta, founder, Sage Capital.