8 Mins

Gold is among the most desired assets in India. Gold is useful for consumption in the form of jewellery and also is an asset that helps in hedging inflation and currency risk. It also diversifies an investment portfolio. There are multiple ways one can invest in gold. For the purpose of investment, physical gold can be quite risky as it is prone to theft and involves storage and carrying costs. Hence Gold ETFs are the perfect alternative to this. This article explains Gold ETF meaning, its features and advantages in detail.

What are Gold ETFs Exchange Traded Funds?

Gold ETFs or Gold Exchange Traded Funds are passive investments that track the domestic price of gold. They invest in gold bullion. They are the dematerialized forms of physical gold. One gold ETF scheme unit equals one gram of gold, and this unit is backed by physical gold of 99.5% purity.

Through this scheme, one can invest in gold as well as participate in the market as these are traded on stock exchanges both domestically and globally. Hence one can buy and sell them on NSE and BSE like any other listed stock. Also, they are listed under the cash segment of the exchanges and are bought and sold at market prices.

The purchase and sale of these mutual funds happen in terms of cash and not gold. Also, the trading takes place through a demat and trading account, making it convenient to transact in gold. Furthermore, this ensures complete transparency in trading in gold.

Since gold is stored in a dematerialized format, there is no risk of theft. Moreover, there are no storage and carrying costs. Also, returns from Gold ETFs are treated as capital gains and taxed accordingly. Hence are more tax-efficient than buying physical gold. They act as a perfect hedge against inflation and currency risk. Moreover, they also help in diversifying an investment portfolio by spreading the risk. 

How Gold ETFs work?

Gold ETFs invest in physical gold bars that are of 99.5% purity. These ETFs can be bought and sold anytime on the stock exchange. The prices of gold ETFs are the same across India, unlike the price of gold bars and biscuits that vary with geographies. With a Demat and Trading account, an individual can easily purchase them on BSE or NSE. Furthermore, these ETFs attract fund management fees and broker charges. 

It is better to invest in these schemes as they are backed by physical gold, and the investor can enjoy the benefit of the change in gold prices instead of buying physical gold. Also, an investor can liquidate their investments at the market price of the gold. Moreover, Asset Management Companies (AMC) also allow investors to redeem Gold ETFs in unit form. In other words, if an investor holds Gold ETFs equivalent to 1kg gold, or in multiples thereof, they can redeem the investment in physical gold form. 

Features of Gold ETFs Exchange Traded Funds

Flexibility

Gold ETFs can be purchased and sold online. Moreover, they can be stored in a Demat account. Hence, there is no risk of storing them.

Liquidity

They are traded on a stock exchange and hence are highly liquid.

Price of Gold

The price of gold is the same in the case of ETFs. It doesn’t differ like physical gold. 

Smaller investments

One unit of Gold ETF scheme equals one gram of gold hence making it convenient for the investors to make small investments.

Costs

ETFs have a maximum expense ratio of 1%. However, there are additional costs of brokerage and transaction costs if traded on stock exchanges.

Taxation

Capital gains or returns from Gold ETFs are taxable based on the holding period of the investment. If they are sold before 36 months (short term), then the capital gains are taxable at the investors’ income tax slab rates. If the investments are sold after 36 months (long term), then the gains are taxable at 20.8% (including cess) after indexation benefits and 10% without indexation benefit.

Benefits of Gold ETFs Exchange Traded Funds

Simple and Open Trading: The minimum investment for a Gold ETF is 1 unit, and this is equivalent to 1 gram of gold. Buying and selling of these ETFs can be done on the stock exchange, and the prices are publicly available.

Smooth Transactions: Buying and selling of these ETFs is done on the stock exchange and during market hours. Therefore it is as easy as trading in equity securities (stocks). Its price of the ETF is not affected by local price differences or VAT, or any other taxes.

Hedge against inflation: Gold as an investment acts as a hedge against inflation and currency fluctuations.

Secure: These schemes are easy and safe investment options compared to physical gold. One doesn’t need to worry about theft, storage, or bearing any additional costs for a locker or making charges. 

Inexpensive: These ETFs don’t have any entry or exit load. They only have broker charges and fund management fees.

Portfolio Diversification: These gold schemes are good investment options for portfolio diversification. During unstable market conditions, these help in reducing the risk.

Loan Collateral: Investors can avail a loan by pledging their ETFs as security with financial institutions.

Who should invest in Gold ETFs?

Gold ETFs are ideal for investors who are looking to diversify their investment portfolio. Moreover, they suit investors who want exposure to gold and also want to participate in the market. Since Gold ETFs are backed by the gold of 99.5% purity, they are low-risk investments. Hence, they suit investors who are looking for low-risk investments.

Gold ETFs reduce the risk and costs of storing gold. Moreover, they are more tax-efficient than physical gold. Hence investors who want to invest in gold with the sole purpose of earning a return and reducing taxes can consider investing in Gold ETFs. Gold ETFs track the prices of gold in real-time. Hence investors who want to track their investments on a real-time basis can consider investing in Gold ETFs..

How to invest in Gold ETF?

To invest in a Gold ETF fund, one has to open a trading and demat account. The account can be easily opened by providing details such as ID proof, address proof and PAN card. With the trading and demat account, the investor can invest in the chosen ETF. One unit of the gold ETF scheme is equal to one gram of physical gold.

The purchase confirmation of the Exchange Traded Fund will be sent to the registered mobile number and email id. Also, a nominal brokerage is deducted for the transaction.

How to sell/ redeem Gold ETF in India?

One can sell or redeem their investment in Gold ETFs through the stock exchange. They need to have a trading and demat account for performing such transactions. These schemes are backed by physical gold of high purity and are hence used as a tool to benefit from the gold price fluctuations. When one sells their investment, they get paid in INR equivalent to the price of the gold. In other words, the Gold ETF price is the same as the price of physical gold. However, AMCs permit redemption in the form of gold units. However, the scheme’s minimum value should be equivalent to 1 kg of gold and in multiples thereof.

Tax on Gold ETFs

Having Gold EFTs is a tax-efficient way to hold gold. They do not attract any wealth tax, or security transaction tax, or GST or wealth tax. Returns from Gold ETFs are taxable as per the investor’s income tax slab rate when the holding period is less than 3 years. For investments with a holding period of more than 3 years (long term capital gains), the income/ gain is taxable at 20.8% (including cess) with indexation benefits.

Gold ETF vs Physical Gold

Following are the differences between the Gold ETF and physical gold.

Basis of DifferenceGold ETFPhysical Gold
MeaningGold ETFs are backed by physical gold of the highest purity (99.5%). They are in demat form.An investor buys gold in physical form for investment or consumption.
PurposeThe purchase happens for investment purposes.The purchase happens mostly for consumption purposes.
PricingThey are uniformly priced as per international standards.The physical gold prices vary from dealer to dealer.
StorageNo need to store the gold in physical form. These ETFs are stored in demat form. Hence no risk of theft and no additional storage costs.Physical gold is stored in lockers and has carrying costs and storage costs. There is also a high risk of theft.
Minimum investmentThe minimum investment is one gram.Gold bars and biscuits of 10 grams are available for investment purposes. However, one can buy one gram of gold as well.
Charges and wealth taxETFs’ expense ratio is capped at 1% and a few additional charges for transaction and brokerage. No wealth tax is levied.Gold has making charges. A wealth tax is also levied if the value exceeds INR 30 lakhs.
LiquidityThese ETFs are very liquid as they are traded on the stock exchange.Gold can be purchased from banks and jewellers but can be exchanged with only jewellers.
Requirement of demat accountDemat account is needed.Demat account is not needed.