What is a Gold ETF?
Gold ETFs are exchange-traded funds (ETFs) that invest in gold bullion. Gold ETFs are passive investments that track the gold prices in the domestic market. Investing in gold ETFs is an alternative to buying physical gold. They are available in a digital format. Each unit of ETF is equivalent to one gram of gold and is backed by gold with 99.5% purity.
Gold ETFs can be bought and sold on stock exchanges. Because the purchase and redemption take place on an exchange, a demat and trading account are required to buy and sell them. These ETFs allow you to invest in gold while also having exposure to the stock market.
Buying and selling of gold ETFs take place in cash and not gold. Thus, all transactions are completely transparent. Upon purchasing a gold ETF unit, they are held in a dematerialized format in your demat account. As a result, there is no additional storage or carrying costs or risk of theft. The expense ratio of Gold ETFs is limited to 1%. However, there are additional transaction and brokerage fees to consider. Gold ETFs do not have any making charges or tax, unlike physical gold.
How Do Gold ETFs Work?
Gold ETFs invest in physical gold bars that have a purity of 99.5%. You can buy and sell gold ETFs on the stock exchange. Gold ETFs have the same price across India, unlike gold bars and biscuits, which have different costs depending on where you are.
Gold ETFs are backed by physical gold and allow the investor to profit from changes in gold prices rather than purchasing physical gold. Additionally, you can sell your ETF units at the current market price. Furthermore, you redeem gold ETFs in physical form. To elaborate, if you are holding 1,000 units of a gold ETF, you can redeem the same in physical form. You will get 1 kg of gold for the 1,000 units you own.
Who Should Invest in Gold ETF?
Gold ETFs are a good investment option for investors looking for diversification. Furthermore, they are appropriate for investors who want to gain exposure to gold while still participating in the market. Gold ETFs are low-risk investments since they are backed by 99.5% pure gold. As a result, they are suitable for those seeking low-risk investments.
Gold ETFs lower the risk and cost of gold storage. Furthermore, gold ETFs taxations are less than physical gold. As a result, individuals who want to invest in gold solely to earn a profit and lower taxes can choose Gold ETFs. Gold ETFs track gold prices in real-time. Also, gold is a good investment that offers a hedge against inflation and currency fluctuations.
Therefore, gold ETFs are suitable for investors who wish to hedge and diversify their investment portfolio with a low-cost option.
Things to Consider as an Investor
Following are the things to consider while investing in Gold ETFs:
- Financial Goals: Gold ETFs are a good option for hedging your investment portfolio. Therefore, if your goal is to diversify your investments, hedge against inflation and protection from market volatility, Gold ETFs are a good option. Thus, assess the suitability of gold ETFs against your investment goals.
- Performance: While investing in a gold ETF, it is essential to analyze the fund’s past performance and the fund house. Though past performance doesn’t guarantee future returns, it is a good indicator to understand the scheme’s performance. A good performance suggests a higher possibility of better results in the future and overall efficiency.
- Liquidity: Gold ETFs are highly liquid. Since they trade on the stock exchange, you can easily buy and sell them anytime. Furthermore, you can redeem gold ETF units for physical gold.
- Tracking Error: Tracking error is the difference between the index’s NAV and ETF’s market price. Gold ETFs are expected to track market prices of gold as closely as possible. Always identify funds with low tracking error to maximize returns. Often, high tracking errors will lower the net returns.
- Taxation: Gold ETFs are non-equity investments. Thus, the short-term capital gains are added to your taxable income and are taxed as per your income tax slab rate. Investment with less than three years of holding attracts short-term capital gains tax. While investments with a holding period of more than three years attract long-term capital gains tax. The long-term capital gains are taxable at 20% with indexation benefits.
- Cost: Gold ETFs are an economical way to acquire gold. Gold ETFs are passive investment schemes; the fund expense ratio is low. Furthermore, since the gold units are held in dematerialized form, the cost of holding the units is negligible when compared to physical gold. Physical gold comes with higher acquiring costs, taxes, storage fees, and risk of theft.
Advantages of Gold ETF Funds
Following are the advantages of investing in gold ETF funds:
- Easy to Invest: A Gold ETF’s minimum investment is 1 unit, which is equal to 1 gram of gold. These ETFs can be bought and sold on the stock exchange, and their prices are publicly disclosed. As a result, it is as simple as trading in stocks. The ETF’s pricing is unaffected by geographical price variances, VAT, or other taxes.
- Hedge Against Inflation: Gold is a good way to protect your investments from inflation and currency movements.
- Secure: In comparison to actual gold (physical form), gold ETFs are simple and safe investment options. There is no need to be concerned about theft, storage, paying extra fees for a locker or making changes. The units of the ETF are held in a dematerialized format in your demat account.
- Entry and Exit loads: Gold ETFs do not have any entry or exit loads. Gold ETFs only charge fund management fees and broker charges.
- Portfolio Diversification: Gold ETFs are good for portfolio diversification. The schemes help in minimizing risk during volatile market conditions.
- Loan: You can take a loan by pledging your ETF units as collateral with financial institutions.