We already understand the benefits of investing under Gold ETF’s over Physical gold like purity, safety, insurance, no wealth tax etc. but it is always been advised by the experts to check the expense ratio before investing in gold ETF’s. So lets have a look ‘What is Expense Ratio and why do we need to check the same before investing in gold ETFs?
What Is Expense Ratio On Gold ETF?
ETFs allows investors to purchase or sell gold units electronically via stock exchange. Fund houses purchases and sells physical gold on behalf of investors and keep the gold units safe in there custody. In simple words, whenever you buy units of gold ETF, the equivalent amount of physical gold is purchased by the fund manager and kept in the store rooms. You will be charged percentage of total asset in the form of fee for the services offered by the fund manager which includes the custody of physical gold, insurance of physical gold, administrative charges etc.. which in broader terms called as Expense Ratio.
Relevance Of Expense Ratio
- Investor should always look for the expense ratio that the fund house will charge for rendering there service as higher the percentage means more fees will be charged from you.
- Whichever fund house you choose to invest in Gold ETF’s the commodity will remain the same i.e Gold so you should look for a fund house will lower Expense ratio.
- Fund house charge expense ratio on the asset under management which is gold in this case, so the expense ratio that your fund house will charge will reduce your gold investment.
- Expense ratio on gold ETFs varies from 1 to 2.5% depending on the fund house you choose to invest.
- The higher the expense ratio doesn’t means your investment is more secured, it the expenses of the fund house which they incur annually for maintaining your investment.
- Lower expense ratio will offer you higher returns on your investment.
- Fund houses calculates NAV of gold ETF after deducting expense ratio.
- Expense ratio varies time to time but fund houses disclose the same only once in six month.
Other Important Points Regarding Investment In Gold ETFs
- Gold ETFs are open ended which means investor can anytime purchase or sell his/ her units without any penalty.
- Each unit of Gold ETF is equal to one gram of gold whereas each unit of Quantum Gold ETF is equal to half a gram of gold.
- Fund houses do not offer tools such as systematic investment plan (SIP) and systematic transfer plans (STP) for investing in gold ETFs.
- Fund houses sometimes sell Gold ETFs at discounted NAV which gives you opportunity to purchase gold unit at lower price.
- Sometimes fund houses offer discount on Gold ETF NAV to attract investors because of liquidity crunch, but you should always invest with fund houses with good liquidity.
- Last traded price of a gold ETFs is different from the NAV of the ETF.
- Gold ETF investors do not have to have sales tax, VAT, wealth tax or securities transaction tax (STT) on gold ETFs.
- Investors have to pay commission on every purchase or sale of gold ETFs.
- Gold ETFs held for more than a year attracts long term capital gain (LTCG) tax on selling gold units at profit whereas Gold ETFs held for less than a year attract short term capital gain (STCG) tax. In both cases profit from sale of gold units will be added to your annual income and taxed according to the tax bracket your income falls in.