Personal Finance

Gold ETFs – Explained in Detail

February 14, 2021

Gold ETFs – Explained in Detail

From time immemorial, Indians have been in love with Gold and for a long time, it has been one of the go-to investment products. In fact, India is the second-largest consumer of yellow metal in jewellery form. Seeing this fondness for the precious metal, Gold Exchange Traded Funds (ETFs) were introduced in India in March 2007. Since then, it has played a key part in the gold market.

Exchange-Traded Fund (ETF) is an investment that contains assets like stocks, commodities, and bonds. They trade on the stock exchange and perform just like stocks.

Gold Exchange Traded Funds are units which represent physical gold that may be in a paper or a dematerialized form. These units are traded on the cash market just like any other company’s stock. Gold ETF is a commodity ETF which consists of only a single asset that is gold.

Gold ETF funds are a more easy and convenient way of owning physical gold. Instead of acquiring and storing physical gold, you can simply purchase units of an ETF which has gold as an underlying asset in it. Buying gold ETFs signify purchasing gold in an electronic form and there is absolute transparency on the holding of a gold ETF because of its direct gold pricing.

Gold ETFs have a direct link with physical gold as the value of the ETF units’ move in sync with the worldwide gold prices. When the price of gold rises, the value of gold ETFs also rises and vice versa. One gram of gold is equal to one unit of gold ETF, thus giving dual benefits to the investors of stock trading and gold investment at the same time.

Gold ETFs are listed and traded on the casting segment of NSE and BSE, like a stock of any other company, and can be bought and sold continually at market prices. You can simply buy and sell gold ETFs just as you would trade in stocks. Also, when you redeem a gold ETF, you don’t get physical gold but obtain the cash equivalent.

When compared to equity gold, gold ETF is a less volatile asset. This helps you to invest in gold without the hassle of storing and securing it from theft. Moreover, due to its concept and distinct structure, ETFs have much lower expenses as compared to physical gold investments.

Purchasing gold in physical forms like gold coins, jewellery, or bars is expensive, but owning it in paper form like gold exchange-traded funds (Gold ETFs) comes at a price near to the actual price of gold. The price difference between the two, physical and paper gold, is mainly due to the jeweller margin, storing costs, making charges, etc involved when acquiring physical gold.

Gold ETFs are listed on the NSE and BSE and are represented by 99.5% pure physical gold. Contrary to physical gold, these exchange-traded funds can be bought and sold at the same price across the nation.

What are the benefits of investing in Gold ETFs?

Here are some of the key features of gold ETFs that make it a lucrative investment choice:

  • Gold ETFs listed on the stock exchange have no entry or exit load for purchase or sale of units.
  • You can simply buy and sell gold ETFs at any time of the day when the stock exchanges are open and can be traded from any part of India.
  • Pricing is done on a transparent basis as ETFs are priced based on real-time gold prices.
  • Gold prices do not usually fluctuate very heavily. Even if returns on equities decrease, gold ETFs could prevent investors from sustaining big losses.
  • Gold ETFs are a good way to add diversity to your portfolio. In the middle of unstable market conditions, a diversified portfolio can provide better returns and reduce risks.
  • Gold ETFs can be pledged as mortgages for loans with financial institutions.
  • There is no wealth tax, no security transaction tax, no VAT and no sales tax. Hence, gold ETFs are a tax-efficient way to hold gold as the income earned from them is treated as long term capital gain.
  • Gold as an investment can act as a hedge against currency fluctuations and inflation.
  • Gold ETFs are an easier investment than physical gold as there is no fear of theft, secure storage or payments such as locker charges or making charges.

How to Invest in Gold ETFs?

Here are two main things that are required to invest in gold ETFs

Open a Demat account on Paytm Money: Gold ETF is a security that is bought and sold in electronic, dematerialised form and not in physical form, a Demat account is required to trade in them. You can simply open a Demat account through your stockbroker or the ETF fund manager you have selected.

Choose a gold ETF product/fund manager: Gold ETF products are offered by various banks and private financial institutions. After you choose a product, your ETF fund manager will act as your stockbroker on the NSE and buy and sell the gold on your behalf. This procedure is just like trading in shares.

Summing up

As an investor, if you choose gold for long-term investment, then it is time to think beyond gold bars, coins, and ornaments and capitalise on innovative assets like gold ETFs. Before investing though, examine the performance of each ETF over recent years and choose the right one that will meet your financial goals.