WHAT IS GOLD ETFs?
Gold ETFs (Exchange Traded funds) is an open-ended fund listed on the exchanges that is based on the gold price. These funds invest in 99.5 % purity gold bullion (by RBI approved banks). In simpler words, Gold ETFs can be explained as units representing physical gold which may be in dematerialized or paper form where one unit of Gold ETF is equal to 1 gram of gold. These are also operated and managed by a body of professionals who are known as fund managers and track the gold prices on trading days. For both buyers and sellers, Gold ETF is an investment option offering high liquidity.
Purchasing Gold ETFs is similar to purchasing gold, the only difference here is the gold is in electric form. These ETFs are traded on stock exchanges like NSE and BSE and an investor can buy and sell through a broker which makes it a very easy-going and convenient way of digitally investing in gold.
Gold ETFs also have an edge over physical gold as they don’t need to be stored in a safe place and their creation mechanism and unique structure are such that the expenses are much lower.
Gold ETF funds can be used as industry ETFs as well, despite being a commodity-based traded fund. It is an ideal and excellent investment strategy to expand a financial portfolio and to get exposure in a variety of gold-related sectors. These traded funds are relatively convenient to obtain and provides a flexible way to invest in the gold industry.
The gold ETFs can also be used as a hedge in one’s investment portfolio as they can offer protection against a fluctuating market. This is because gold has a very low correlation with other capital assets like equity. In simpler words, this instrument can be termed as a defensive alternative. If any major currency like the USD goes down, gold tends to rise significantly which could reduce overall risks & volatility in the investor’s portfolio.
HOW GOLD ETFs WORK?
Gold ETFs can be bought and sold on stock exchanges through a broker as they are listed and being traded on a daily basis. These represent 99.5% pure physical gold bullions with prices listed on the stock exchange. Unlike physical gold, these can be bought and sold at the same price all over India.
Must Read: Understand the Difference Between ETF vs Mutual Funds
WHO SHOULD INVEST IN GOLD?
Gold ETFs are ideal for investors who are looking to expand and diversify their portfolios with exposure to the gold market. It can offer the benefits of diversification because of its’s low correlation with other capital assets. The sum invested goes towards standard gold bullion which is 99.5% pure. This is as good as buying physical gold. Investors, not willing to spend money on additional tax and storage facility as in the case of physical gold can go for gold ETFs. Also, individuals can look into buying gold ETFs/mutual funds periodically to save for their future requirements like marriage and later sell them whenever required.
FEATURES AND BENEFITS
Gold ETFs offer high liquidity to investors as they can be traded in the stock market during market hours at the prevailing rates. Also, the additional and transactional expenses (govt duty and broker fee) are low when compared to the costs associated with buying physical gold.
Gold ETFs can be purchased online and placed in the investors’ Demat account. The asset management company (AMC) is responsible for managing the investments in gold. You can enter/exit at any time during market hours whenever required. These ETFs behave the same way as physical gold in terms of prices, even in the Demat format.
3. Ease of participation:
With gold ETFs, investors get an opportunity to explore the gold market – a profitable, transparent, and secure platform. Also, they come with great liquidity as gold can be traded instantly without any inconvenience.
4. Smaller Denomination:
Approaching a retailer will need a large sum to purchase gold. But, in the case of gold ETFs, an investor have the advantage to decide the quantity he/she wishes to purchase and sell as per the NAV price.
These ETFs offer a tax-friendly means to hold gold as the returns generated from Gold ETFs with a holding period of 3 years or more is subject to LTCG tax. The LTCG tax rates are lower and therefore it can offer tax-efficient returns.
6. Easy of holdings:
Storage (in Demat account) and security are no issues here. Hence, an investor can hold on to the ETFs for as long as he wants.
7. Ease of Transaction:
Besides being listed and trading on the stock exchange, the investor can also use it as a pledge for secured loans. Transactions are seamless and quicker with no entry and exit load.
Taxed levied on these ETFs are similar to that levied on buying or selling of physical gold. An investor will be liable to pay capital gains tax if he/she trades these funds and make profits. Taxes are applicable to both long-term as well as a short-term investment in these ETFs.
There are 2 different types of tax levied on gold ETFs, LTCG (Long Term Capital Gains) Tax, applicable for investments with a holding period of 3 years or longer. In this case, an investor has to pay a capital gains tax of 20% after indexation benefits as applicable. For the short-term, ETFs attract capital gains tax at the same rate as applicable to an individual’s current tax slab.
GOLD vs GOLD ETFs
|Objective||For a long or short term financial goals||Personal use, loan collateral|
|Type||It is a form of investment||Idle Wealth|
|Storage||No need to store. Thus, no risks of theft or loss.||Must be stored away safely and securely|
|Price||NAV linked to the price of physical gold, subject to fluctuations.||Subject to market-rate fluctuations|
|Costs||Fund management expense i.e Expense Ratio which could include brokerage, management & other expenses.||High Making Charges, Insurance costs, locker costs, etc.|
|How to buy?||Trades on the Stock Exchange. Can be purchased through a trading & Demat account.||Can be purchased from a jeweler/retailer.|
There are some risks associated with gold ETFs that an investor needs to be aware of before making any investment decision. Here they are:
- Price fluctuations: Just like in any equity-related product, the NAV (Net Asset Value) of the units issued under a gold ETF can go up or decline with the change in the price of gold according to economic scenarios & market conditions.
- Less overall returns: The additional charges – commission, brokerage, fund management fees, etc – to maintain a gold ETF could bring down its overall returns in comparison with the sale of physical gold.
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