The 2024 Union Budget unveiled some good news for gold investors. All long-term capital gains on gold mutual funds and gold ETFs will be taxed at 12.5 per cent. In the last Budget, these were bought under the ambit of a new specified mutual fund category – section 50AA and were taxed at the slab rate at par with debt mutual funds, irrespective of the holding period. Gold funds have been excluded now from this category. .
Further, the latest Budget provided for standardizing the holding period for all listed & unlisted assets. Consequently, the long-term holding period for gold mutual funds has been reduced from 36 to 24 months. For listed ETFs, it has been brought down further to 12 months. Gold ETFs are passively managed products listed on the stock exchange investing in standard gold bullion of 99.5 per cent purity. Gold mutual funds or fund of funds invest, in turn, invest in these Gold ETFs.
This disparity in the holding period between gold mutual funds and gold ETFs is looking attractive to many investors. Afterall, with the same level of taxation at 12.5 per cent, investors need not wait 24 months to be invested in a gold fund when they have the option to cash out in 12 months in a gold ETF.
Does this difference of 12 months make a strong case for investing in gold ETFs, rather than gold mutual funds? Absolutely not.
It is important to understand the nature of the underlying asset class first before the holding instrument. Gold prices are volatile like equity, possibly more. Post the budget announcement of a cut in import duty from 15 to 6 per cent, domestic gold prices tumbled nearly 4-5 per cent in a single day, around Rs.4,500 per 10 grams.
Gold has its own long-term commodity cycle with prices depending upon geo-political factors besides demand-supply situation. Gold can be an excellent diversifier in a portfolio, with a maximum allocation of not more than 10-15 per cent from the long-term perspective.
So, the shorter holding period of gold ETFs vis-a-vis gold mutual funds should not matter at all for investors accumulating gold in their portfolio.
While gold ETFs offer trading convenience and price transparency on the stock exchanges, trying to take advantage of short-term fluctuations can catch investors off-guard many times. For listed investments, the typical tendency to time the markets sets in and the discipline to invest in a regular manner is lost. These are more suitable for short-term traders who desire to take tactical calls and more risk. For long-term investors, gold mutual funds are a suitable way to accumulate gold in a disciplined manner over time.
To reiterate, investing goes beyond minimising the tax impact. The choice and suitability of instrument, time horizon and how they fit in an investor’s portfolio is more important.