Gold BeES work by tracking gold prices in the market as they move up or come down. A fund manager buys physical gold in the form of bars and coins (bullion) as a part of the assets of the ETF. One unit of Nippon India ETF Gold BeES (GOLDBEES) actually represents approximately 0.01 gram (one-hundredth of a gram) of physical gold.. Since the price of gold keeps varying in daily stock turnover, Gold BeES units have market risk. The units can be bought and sold on the exchange just like shares by investors. ETF Gold BeES is priced equivalent to the spot price of gold, minus management and trading costs. It makes Gold BeES a more transparent and efficient way to own gold without owning it physically.
Characteristics of Gold BeES
- Fractional ownership: Gold BeES offer investors a unique advantage by allowing for ownership of a fraction of a gold bar or coin. Each unit represents just 0.01 grams of gold, making it accessible to those with smaller investment budgets.
- High-purity backing: The value of Gold BeES is directly linked to the spot price of gold due to their backing by physical gold bullion with a purity of 99.5%. This ensures that investors benefit from the market value of gold.
- Liquidity and accessibility: Gold BeES are listed on prominent stock exchanges like the BSE and NSE, providing investors with high liquidity. This enables easy buying and selling of units, making gold investment more convenient.
Benefits of investing in gold BeES
- High liquidity
Gold BeES are listed on stock exchanges, making it easy to buy or sell units during market hours. Unlike physical gold, there is no need to find a buyer or deal with lengthy selling processes, allowing investors to access their money quickly when required. - Cost effective
Gold BeES help reduce expenses linked to physical gold, such as making charges, storage, insurance, and security costs. This makes them a more affordable option for investors looking to gain exposure to gold. - Flexible and secure transactions
Gold BeES are bought and sold through a Demat account. Electronic transactions offer greater transparency, security, and convenience, making the investment process simple and reliable for investors. - Ability to purchase in small quantities
You can invest in Gold BeES with a small amount, making gold investing more affordable. This allows investors to build their gold holdings gradually without needing a large initial investment. - Benefits of investing in gold BeES
Gold BeES units can be pledged with brokers as collateral. Investors can use them as trading margin while investing in other securities, helping them make better use of their existing investments.
GoldBeES vs Physical Gold
The table below highlights the key differences between Gold BeES and physical gold across important investment factors.
| Factor | Gold BeES | Physical Gold |
|---|
| Purpose | Designed for investors seeking exposure to gold prices through a fund that holds physical gold (99.5% purity). | Commonly purchased for jewellery, gifting, or long-term asset holding. |
| Storage | No physical storage required since units are held electronically in a demat account. | Requires safe storage at home or in a bank locker, which may involve additional costs. |
| Costs | Includes brokerage or transaction charges on exchange trades along with the fund’s expense ratio. | Includes making charges (for jewellery), storage costs, and price spreads when buying or selling. |
| GST on purchase | No GST is charged when buying Gold BeES units. | Gold purchases attract 3% GST on the gold value, and a 18% GST on the making charges of jewellery |
| Convenience and safety | Held in electronic form, eliminating storage risks. Units can be bought or sold easily during stock market trading hours. | Requires secure storage and purity verification at the time of resale, which can make transactions less convenient. |
| Liquidity | Highly liquid as units trade like stocks on exchanges, though minor deviations from actual gold prices can occur due to tracking errors. | Liquidity depends on the type of gold (jewellery, coins, bars) and the buyer’s purity assessment during resale. |
| Price tracking | Attempts to track the market price of gold, although prices may differ slightly due to expenses and market trading factors. | Resale price depends on purity, making charges, and the offer provided by the buyer. |
Gold BeES returns and historical performance
Gold BeES returns largely track the movement in domestic gold prices. However, returns can vary across different time periods, and past performance does not guarantee future returns. Investors should use historical performance only as a reference while making investment decisions.
The table below shows the historical returns of Gold BeES across different investment periods.
| Period | Return |
|---|
| 1 year | 48.36% |
| 3 years (annualised) | 34.33% |
| 5 years (annualised) | 23.75% |
| Since inception (annualised) | 14.09% |
The historical performance of Gold BeES highlights its ability to generate returns in line with changes in gold prices over the long term. However, short-term performance may fluctuate due to factors such as global economic conditions, inflation, interest rates, currency movements, and investor demand for gold. Before investing in Gold BeES, you should consider your financial goals, investment horizon, and risk appetite.
Disadvantages of investing in Gold BeES
However, along with the benefits, there are some disadvantages of investing in Gold BeES as well. Liquidity risk, price volatility, market risk, market inefficiencies and counterparty risk. Considering these risks is crucial for an investor before investing in ETF gold BeES.
1. Liquidity risk
Gold BeES are usually considered liquid, but they may be less so in a given market fall or low trading volume periods. Investors may have to consider selling on their returns at times, otherwise, they might find it difficult to sell their units in periods of market downturns.
2. Price volatility
Since gold prices depend on several factors like prevailing economic conditions, geopolitical tensions, currency fluctuations and changes in demand-supply, this makes it a volatile investment proposition. These swings affect the price of Gold BeES and will also reflect through an investor’s portfolio, impacting net worth. Investors should be cautioned that there is risk to their investment, and they may lose value.
3. Market risk
Like every mutual fund, in the case of Gold BeES value grows with the market and declines when conditions change. Gold prices and hence the value of ETF gold BeES are also influenced by factors such as changes in interest rates, inflation levels or vulnerabilities and changes in investor sentiment. They also represent market risks, so investors should be prepared to potentially face some losses.
4. Market inefficiencies
In certain scenarios, market inefficiencies can make the price of Gold BeES deviate from gold spot prices. This may be due to factors like management fees, transaction costs or there being fluctuations in supply and demand in the market. However, one must bear in mind that the price of Gold BeES may not always accurately reflect gold prices, at least in the short term.
5. Counterparty risk
Since Gold BeES are fully backed by physical gold stored in secure vaults, the counterparty risk is very low. However, a small level of risk may still exist if the custodian, which is the third-party institution that stores the physical gold bullion, or a major clearing entity experiences a serious operational failure, financial default, or bankruptcy.
Taxation of Gold BeES
The tax treatment of Gold BeES depends on how long you hold the units before selling them. The applicable tax rules are as follows:
Short-term capital gains (STCG)
- If you sell Gold BeES within 12 months of purchase, the profit is treated as short-term capital gains.
- The gains are added to your total taxable income and taxed according to your applicable income tax slab.
Long-term capital gains (LTCG)
- If you sell Gold BeES after holding the units for more than 12 months, the profit is treated as long-term capital gains.
- Long-term capital gains are taxed at 12.5% without indexation benefits.
Dividend tax on Gold BeES
- Any dividend received from Gold BeES is added to your total taxable income and taxed according to your applicable income tax slab. The tax treatment may change based on the latest income tax rules.
How to invest in Gold BeES?
Follow these steps to invest in Gold BeES:
- Choose a Broker: Visit the website or app of your preferred brokerage platform.
- Open a Demat and Trading Account: Complete the account opening process by submitting the required documents. Don’t forget to link your bank account to your Demat account.
- Select Gold BeES and Place Your Order: Choose the Gold BeES you want to invest in and place an order for the desired number of units.
- Confirm Your Transaction: After placing the order, check your phone or email for confirmation. Please note, a brokerage fee will be charged on your transaction.
Why invest in Gold BeES?
- Lower cost: Investing in Gold BeES involves only minimal brokerage charges. In contrast, buying physical gold often includes high mark-ups and the loss of GST benefits.
- Secure holding: Gold BeES are held in electronic form and stored safely in your demat account. Unlike physical gold, there are no concerns around storage costs, insurance, theft, or misplacement.
- Trading margin benefit: Gold BeES are accepted as collateral for trading and can be used as margin on stock exchanges.
- Small investment size: Gold BeES can be purchased in units as small as 0.01 gram. This offers more flexibility compared to gold bonds, which usually require a minimum investment of one gram.
Who should invest in Gold BeES and ETFs?
Advantages of Investing in Gold ETFs:
- Assured gold quality: Each ETF unit is backed by physical gold of high purity.
- Real-time price tracking: ETFs reflect current gold market prices, ensuring transparency.
- Easy trading: Buy and sell on stock exchanges, just like stocks.
- Tax benefits: Long-term capital gains tax rates apply for holdings over 12 months.
- No extra taxes: No wealth tax, STT, VAT, or sales tax on Gold ETF holdings.
- Safe and secure storage: Held electronically in your demat account, eliminating physical storage concerns.
- Potential loan collateral: Can be used as collateral for loans with certain financial institutions.
- No load charges: No entry or exit fees.
How do Gold BeES perform against other gold assets?
There are four commonly used gold investment options: Gold BeES (which perform similarly to gold ETFs), physical gold, digital gold. The comparison below highlights how these four gold assets differ across key parameters.
Note: Sovereign Gold Bonds have been excluded from this comparison as they have been discontinued by the government.
| Factor | Gold BeES | Physical gold | Digital gold |
| Returns | Average gold price appreciation | Average gold price appreciation | Average gold price appreciation |
| Extra gold | Not applicable | Not applicable | Not applicable |
| Liquidity | Highly liquid, can be withdrawn as cash anytime | Liquid, but selling physical gold involves manual effort | Highly liquid, can be withdrawn as cash anytime |
| Modes of investment | Monthly SIPs or one-time investments | One-time investments | SIPs or one-time investments |
| Minimum investment | 1 unit (currently trading around Rs. 75) | Gold coins can be purchased from 0.1 gram | Rs. 10 |
Points to note when buying into Gold BeES
- Consider the fund's scale, as indicated by its assets under management, and its trading activity, as measured by average daily turnover.
- Evaluate the impact cost to assess the instrument's liquidity, or its ability to be bought or sold without significantly affecting its price.
- The fund's tracking error relative to the benchmark gold should be minimised to ensure its performance aligns closely with the underlying asset.
Gold Bees vs Gold ETF
This table summarises the key comparisons between Gold BeES and other gold ETFs:
| Aspect | Gold BeES vs. Gold ETFs |
| Cost | Gold ETFs are generally more affordable compared to purchasing physical gold. |
| Liquidity | Gold ETFs offer better liquidity than physical gold, as they can be easily bought and sold on exchanges. |
| Security | Gold ETFs are typically considered safer than physical gold. |
| Investment Size | Gold ETFs allow investment with amounts as low as Rs 20, unlike physical gold which requires a larger investment. |
| Impact Cost | As of July 2024, Gold BeES has an impact cost of 0.02%, which is lower compared to other gold ETFs. |
| Size and Longevity | Nippon India ETF Gold BeES, also known as GOLDBEES, is one of India’s largest and oldest gold ETFs. |
| Tracking | Gold ETFs track the price movements of physical gold. |
Difference between Gold BeES and SGB
When considering gold investment options, Gold BeES (a type of Gold Exchange-Traded Fund) and Sovereign Gold Bonds (SGBs) are two prominent choices. While both provide exposure to gold prices, they differ in structure, returns, liquidity, and taxation.
Here is a comparative overview:
| Parameter | Gold BeES (Gold ETF) | Sovereign Gold Bonds (SGBs) |
| Issuer | Asset Management Companies (e.g., Nippon India) | Reserve Bank of India (on behalf of the Government of India) |
| Form | Open-ended mutual fund scheme investing in physical gold | Government security denominated in grams of gold |
| Tenure | No fixed tenure; can be held indefinitely | 8 years with an exit option after 5 years |
| Interest Rate | No interest; returns solely based on gold price appreciation | Fixed interest rate of 2.5% per annum, paid semi-annually |
| Liquidity | Highly liquid; traded on stock exchanges during market hours | Less liquid; tradable on exchanges after 5 years, but secondary market liquidity is limited |
| Taxation | Capital gains taxed as per holding period; no tax benefits on redemption | Capital gains tax exempt if held till maturity; interest income is taxable |
| Collateral Usage | Generally not accepted as collateral | Can be used as collateral for loans |
Ways of investing in gold
Gold has been a valuable asset for centuries and continues to be a popular investment choice. There are several ways to invest in gold, each offering distinct advantages and characteristics. Here's an overview of the most common methods:
- Physical Gold: Investing in physical gold typically involves purchasing items such as gold coins, bars, or jewelry. This method provides tangible ownership, which is appealing for many investors who prefer to hold their assets physically. However, owning physical gold also means that investors must account for storage and security costs, such as a safe deposit box or home storage, along with potential premiums over the market price.
- Electronic Gold (E-Gold): E-Gold is a digital form of gold, where investors hold gold in a dematerialised form rather than physical bars or coins. It is held in electronic accounts and traded like shares. E-Gold allows for easier buying, selling, and transferring of gold, offering a more convenient method of investing compared to physical gold.
- Gold BeES ETF (Gold Exchange Traded Fund): Gold BeES is a type of gold-backed exchange-traded fund (ETF) that allows investors to buy and sell gold on the stock market. Each unit of Gold BeES is backed by physical gold, but the investor does not hold the physical asset. This method combines the advantages of both gold and the stock market by providing liquidity and ease of access.
- Sovereign Gold Bonds (SGBs): Sovereign Gold Bonds are government securities issued by the Reserve Bank of India (RBI) on behalf of the government. These bonds offer investors a fixed interest rate along with the benefit of gold price appreciation. The bonds are issued in denominations of gold grams and are available for purchase during specific government-issued offers.
- Gold Funds: Gold funds are mutual funds that invest in gold-related assets, including physical gold, gold futures, and shares of gold mining companies. These funds provide investors with exposure to gold without directly buying physical gold or gold ETFs. They are ideal for those who prefer professional management and diversified exposure to the gold market.
Conclusion
Gold BeES are an effective and hassle-free tool to invest in gold, without actually buying gold physically. Given its high liquidity, low cost and portfolio diversification benefits, it is an attractive alternative mode of investment in gold for investors. But at the same time, investors should be informed about risks attached to investing in Gold BeES, which can include liquidity risk, price volatility & counterparty risk.
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