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Invest in Top Gold ETFs In 2021: High Return Mutual Funds In India

Looking to Invest in Top Gold ETFs? Here is a list of Top Gold ETFs. Learn about various factors such as returns, risks and taxation associated with Gold ETFs
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Gold ETF: One of the best ways of investing in gold

We Indians love our gold. Indian citizens hold one of the highest amounts of gold, even more than the central banks of many countries. Many Indians buy gold regularly; some buy for goals like accumulating it for their child's wedding, some buy it as a custom during festivals like Akshay Tritya and Diwali, some buy it for investment purposes, and some buy it to make jewellery. Over the years, many modes of buying gold have emerged. Some of these include physical gold, Exchange Traded Funds (ETFs), gold mutual funds (FoFs), Sovereign Gold Bonds (SGBs), digital gold, etc. This article focuses on how to invest in top gold ETFs in 2021.

What are gold ETFs?

A gold exchange-traded fund (ETF) is a financial product, offered by mutual funds, that allows you to invest in gold. When you invest in a gold ETF, the mutual fund invests your money in physical gold on your behalf. The fund house allots you gold ETF units in proportion to your investment in return for your gold ETF investment. One gold ETF unit is usually equivalent to one gram of gold. The price of one unit of gold ETF tracks the price of 1 gram of physical gold.

The gold ETF fund house declares the net asset value (NAV) of a single gold ETF unit. However, during market trading hours, the price of one gold ETF unit may get traded at NAV or a premium or discount to the NAV. Your profit or loss depends on the difference between the current price of one gold ETF unit and the price at which you bought the unit.

To buy gold ETF units, you need a trading and demat account. You need to place a buy order through your broker’s website. The gold ETF price gets debited from your bank account, and the gold ETF units get credited to your demat account. Similarly, when you sell gold ETF units, the units are debited from your demat account, and money gets credited to your bank account.

Returns given by the best gold ETF

Let us now look at the returns given by some gold ETFs.

Table: Returns given by gold ETFs

Scheme nameAUM (Rs. crores)1-year3-years5-years
HDFC Gold Exchange Traded Fund2,8945.10%13.30%10.17%
Kotak Gold ETF2,1615.14%13.53%10.16%
Aditya Birla Sun Life Gold ETF3295.18%13.63%10.15%
Nippon India ETF Gold BeES6,2164.14%13.28%9.96%
Axis Gold ETF6145.19%13.63%9.94%
ICICI Prudential Gold ETF2,2735.16%13.32%9.82%

(Source: https://www.personalfn.com/factsheet/axis-gold-etf)

Note: The returns are as of 15th Feb 2022. The returns are for direct plans with growth option. The one-year returns are absolute. The three and five-year returns are CAGR. The funds have been ranked based on five-year performance.

The above table shows the best gold ETF in India has given returns of 10.17% CAGR in the last five years.

Who should invest in gold ETFs?

The following individuals should invest in gold ETFs:

  1. Portfolio diversification through asset allocation: As an investor, if you want to spread your investment portfolio among various asset classes to diversify your risk, you should invest in gold ETFs for the gold portion of your investment portfolio.
  2. To create wealth: Gold as an asset class has done well in the past and has given good returns to investors. So, if you want to create wealth, you should invest in gold ETFs.
  3. Safe haven: Gold acts as a safe haven during stock market downturns due to events such as recession, war, pandemic, political instability, etc. So, if you are looking for a safe haven during such events, you should invest in gold ETFs.
  4. Inflation hedge: Gold acts as a hedge against inflation. So, if you wish to protect your investment portfolio against inflation, you should invest in gold ETFs.

Taxation of gold ETFs

Let us understand the taxation of gold ETFs:

  1. Short-term capital gains (STCG) tax: If you sell your gold ETF units within thirty-six months of purchase, the capital gain will be classified as short-term capital gain (STCG). The short-term capital gain (STCG) will be added to your overall income and taxed as per the income tax slab that you fall in.
  2. Long-term capital gains (LTCG) tax: If you sell your gold ETF units after thirty-six months of purchase, the capital gain will be classified as long-term capital gain (LTCG). The long-term capital gain (LTCG) tax will be levied at 20% with indexation benefit and 10% without indexation.

Risks involved in gold ETFs

The price of gold, just like any other asset class, goes through its own cycles of ups and downs. Sometimes, these cycles can go on for years in one direction before reversing direction. Gold ETFs track the price of physical gold. So, there is a risk of losses if you invest in gold ETFs during a down cycle till it reverses and the next upcycle begins.

Return potential of gold ETFs and compounding effect

In the table in the earlier section, we saw how gold has given around 10% CAGR in the last five years, which is a good rate of return. Your near-term returns from gold ETFs depend on whether gold is in an upcycle or a down cycle at the time of your investment. However, long-term investors need not worry about the upcycle or down cycle. You can regularly invest in Gold ETFs and benefit from the power of compounding in the long run.

For regular disciplined investing, there is no SIP option in gold ETFs. However, you can start a systematic investment plan (SIP) in a gold mutual fund, which invests in gold ETF units.

What are the advantages of gold ETFs?

Some of the advantages of investing in gold ETFs include:

  1. The minimum investment amount in gold ETFs is just one unit, which is equivalent to the price of 1 gram of gold.
  2. Gold ETFs give you an opportunity to invest in gold in electronic format. So, you don't need to worry about purity. You also don't need to incur storage costs like bank lockers and insurance costs.

Reasons to invest in Gold ETFs

For many individuals, one of the biggest reasons for investing in gold ETFs is to accumulate gold for long-term financial goals, such as accumulating gold for your child's marriage.

Asset allocation: Gold ETFs provide investment portfolio diversification

Asset allocation requires individuals to diversify their investment portfolio across various asset classes such as equity, gold, fixed income, real estate, etc. Gold ETFs are a good financial product to invest the gold allocation portion of your investment portfolio.
To start investing in retirement mutual fund schemes as per your appropriate asset allocation, download the Glide Invest App from Google Play Store or Apple App Store and get started.

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