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Nippon India ETF Gold BeES: Good vehicle to hike gold exposure

Kumar Shankar Roy BL Research Bureau | Updated on March 13, 2021

The exchange-traded fund ticks all boxes as an efficient tool to track gold prices

In the past six months, the domestic price of gold has slipped nearly 11 per cent amid a strengthening rupee, falling global gold prices and reduction in customs duty.

Investors should use the present correction in gold prices to increase their allocation.

Macro-economic uncertainties, such as threat of high inflation, lower real interest rates and overvalued asset bubbles, have not receded. Against this backdrop, gold remains an effective portfolio diversifier.

 

Investors who anticipate gold prices to remain lower for longer can stagger their purchase in units of Nippon India ETF Gold BeES, an exchange-traded fund with a 14-year track record. The ETF offers best-in-class liquidity and convenient exposure to gold under a decent cost structure.

Why this fund

A gold ETF is a passive investment instrument that aims to closely track the returns provided by the domestic price of gold.

Gold ETFs buy physical gold of 99.5 per cent purity, and investors get the units of the ETFs.

Nippon India ETF Gold BeES is a good option on account of it being the most liquid and actively traded gold ETF. This must be seen in the context of the ETF being the biggest in terms of assets (₹5,519 crore) and having the highest six-month average daily turnover of ₹20 crore (NSE).

Impact cost is a practical and realistic measure of market liquidity. Nippon India ETF Gold BeES has the minimum impact cost of 0.03 compared with peers such as HDFC Gold ETF (0.05), SBI ETF Gold (0.05), Kotak Gold ETF (0.07) and ICICI Prudential Gold ETF (0.12).

ETFs are traded like stocks, thereby facilitating fast entry and exit through the stock exchanges during market hours.

The Nippon ETF has a reasonable expense ratio of 0.82 per cent (others charge up to 1.07 per cent). It has reported returns of 18.81 per cent, 16.34 per cent and 11.51 per cent in one-, three- and five-year periods, respectively, as on January 31, 2021.

A low tracking error means an ETF’s portfolio is closely following its underlying. Nippon India ETF Gold BeES has the lowest tracking error among its peers. Thus, it ticks the maximum boxes as an efficient vehicle to track gold prices.

Rising yields and a strong dollar have weighed on global gold prices, of late. However, positive drivers of gold price such as growing inflationary pressure and monetary expansion initiatives are still in place.

Hence, investors can benefit from holding gold (possibly 10-15 per cent) in their portfolio from the point of view of asset diversification.

Advantage ETF

There are two areas where gold ETFs have a clear edge over Sovereign Gold Bonds (SGBs). Buying and selling SGBs in the secondary market may not be easy because of insufficient volumes.

Besides, primary SGB issues come in tranches and thus are not an all-year-round choice. Gold ETFs, on the other hand, can be bought any time.

Compared with high spreads of 3-8 per cent while transacting in physical gold, purchasing units of gold ETFs entails a small brokerage charge of 0.5-1 per cent (apart from the expense ratio).

You can also buy gold ETF units in small quantities. For instance, a unit of Nippon India ETF Gold BeES is approximately equal to 0.01 gram of gold. In comparison, the minimum initial investment is 1 gram for physical gold for SGBs.

Long-term capital gains (LTCG) tax at 20 per cent with indexation benefit is applicable on gold ETFs if gains on units are held for more than 36 months. Short-term capital gains (STCG) tax is imposed at the investor’s income-tax slab rate if gains on units are held for less than 36 months. This is similar to capital gains on SGBs sold in the secondary market.

(This is a free article from the BusinessLine premium Portfolio segment. For more such content, please subscribe to The Hindu BusinessLine online.)

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Published on March 06, 2021
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