Fund question: do gold sovereign bonds score higher than ETFs?

By on August 28, 2021 0

I have been a long-time investor in Gold BeES even before the launch of gold sovereign bonds. Previously, gold ETF prices seemed to align with national gold prices, but lately they have diverged. The current price of my gold ETF is around 41 while the price of gold is 47. Am I now stuck in this low-cost ETF? In the world of GBS, how much more attractive is Gold BeES? Should we avoid investing in ETFs now?

Devendra Narkhede

Gold ETF prices could diverge from the gold rates you see in the domestic market for four reasons. First, gold ETFs charge an annual expense ratio to their net asset value for fund management fees and operating costs. Over time, this expense ratio causes the net asset value to lag behind the underlying gold prices. The current expense ratio of Nippon India Gold Bees is 0.82% per annum, which over time is the main factor causing ETF returns on gold to lag the returns on the price of gold. ‘gold. If you assess the program’s 5-year return, it’s around 7.2 percent versus around 8 percent on national gold prices.

Second, gold ETFs hold a portion of their assets in cash and debt instruments to meet redemption demands, which can also cause the returns of pure gold to lag behind. Gold Bees holds approximately 1.3 percent of its assets in instruments other than gold.

Third, gold ETFs in India base their net asset value on the landed price of gold as traded in the LBMA at the prevailing exchange rate. Domestic gold prices may diverge from this translated price, resulting in reductions or premiums on ETF NAVs compared to domestic gold rates.

Fourth, there may also be a difference between the net asset values ​​of ETFs and their market traded prices. ETF prices may fall at a premium or at a discount to net asset value due to supply and demand factors. In the long run, all of these factors can add up to a certain lag (around 1 percent) between gold price returns and ETF returns.

Gold sovereign bonds have distinct advantages over gold ETFs for investors because they don’t charge an expense ratio, in fact, pay you interest on the initial value of the bond. Their returns must therefore follow gold prices more closely than ETFs. Theoretically, SGBs should offer higher returns than ETFs over comparable periods. SGB ​​returns are also exempt from capital gains tax if they are held to maturity.

However, in practice, SGBs are not that liquid and therefore their traded prices on the secondary market also diverge from their underlying value. They are also not easy to acquire or sell in secondary markets. Investors who like to plan their entry and exit of gold or those who like to invest in equal installments therefore prefer gold ETFs to SGBs.

I am 60 years old and recently retired. I have an accumulation of ₹ 50 lakh on my EPF account. Is it advisable to continue to keep this amount in the PF account which earns me 8.5% interest tax free? Or is it better to take that amount out and invest in debt funds, which are likely to have higher returns than the ones above, which I might need on a monthly basis? I am moderately risk averse.

Murali manohar

Since you have already reached retirement age and are at age 60, your EPF balance will only continue to earn interest for three more years. The changes made to the EPF rules a few years ago made it possible to credit interest on the EPF accounts for three years after the employee stopped contributing to them. However, the decisions of the tax court also make the interest on EPF balances taxable once the employee has left his job. Therefore, you need to compare the after-tax EPF returns to other avenues.

As to where you can reinvest that amount for regular income, you may want to consider government-backed options such as the Post Office Senior Citizens Savings Scheme, LIC’s PM Vaya Vandana Yojana, and GOI Floating Rate Savings Bonds, as they have a higher return potential than debt mutual funds and also offer superior safety of capital.

Given the low levels of interest rates prevailing in the economy and the likelihood that they will increase from there, returns on debt mutual funds over the next three years are unlikely to equal those of the last three years. The main advantage that loan funds can offer over government options, however, is your ability to withdraw money at any time and pay a lower capital gains tax rate on your returns, indexed. on inflation, instead of taxes at your slab rate. We suggest that you explore government programs first and place the residual amounts in debt funds for these benefits.

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