Gold Exchange Traded Funds (ETF) have a structure similar to Index Mutual Funds where they pool the money of investors and provide them exposure to the Gold Market. The first Gold ETF (Gold BeEs) was launched in India in 2007.
What is a Gold Exchange Traded Fund (Gold ETF)?
The Gold ETFs are generally valued at the prevailing market price of gold. These ETFs invest in physical gold and companies involved in gold mining, manufacturing, transport industry, etc. There is not much difference between the price of gold and the price of ETF.
They have characteristics of both stocks and mutual funds. The ETFs are traded on major stock exchanges like an individual stock, just like the stock of a company. These ETFs are considered to be one of the best defensive assets in the market and can protect your portfolio against inflation, stock market fall, or fall in the currency market. Generally, the price of gold tends to rise when major currencies like the dollar fall. The Gold ETF allows you to profit from such a situation.
Why is Gold ETF required?
A person who wants to invest in gold as a commodity through the stock market can either invest in a company dealing in gold or trade gold Futures & Options. Investing in Futures and Options is risky and requires a lot of capital, which may not be possible for a retail investor. On the other hand, investing in a company dealing in gold will not provide you with returns similar to gold and you will be exposed to the performance of the company. Gold ETFs are a good alternative that allows investors to invest directly in gold commodities and start trading with as low as 1 unit, which is equivalent to 1 gram of Gold. Thus, Gold ETFs make an investment in gold accessible for retail investors.
Features of Gold ETF
- Purity and Quantity: 1 Gold ETF is equivalent to 1 gram of Gold. The ETFs only purchase Gold which is 99.5% pure.
- Convenience: Investors can easily purchase the ETF through their Demat Account. As the Asset Management Company (AMC) is responsible for trading them, you do not have to spend much time on analysis.
- Transparency: As the gold prices are updated on the stock exchanges in real-time, you can easily track the impact of change in gold prices on your ETF investment.
- Liquidity: As the ETFs are traded on the stock exchange, you can easily sell your ETF during market working hours at the prevailing price in the market.
- Taxability: Investors only have to pay capital gains tax on Gold ETF. Other types of taxes such as GST, wealth tax, and security transaction tax are not applicable.
- Low Cost: Gold ETFs are comparatively cheaper than physical gold due to reasons such as zero making charges and zero GST.
- Safety from Theft: As the Gold ETFs are stored in electronic form in your Demat Account, you do not have to worry about their storage and save on locker storage costs.
- No Entry and Exit Loads: You do any have to pay any entry or exit load, which means that you will not have to pay any additional charge when buying or selling the ETF.
- Safe Investment: Gold Prices are comparatively less volatile than stocks, which ensures stable returns for investors in the long term.
- Collateral Option: Gold ETFs are accepted by financial institutions as collateral to obtain a loan.
- Hedging against Inflation and Stock Market: Gold is a precious metal that is known for offering returns to investors higher than the inflation rate in the long term. In addition, Gold is considered a defensive asset that is known to appreciate when the stock market falls. This reduces the risk of your overall portfolio in case of a market fall.
- Low Expense Ratio: Gold ETFs have a lower expense ratio than equity mutual funds. You only have to pay brokerage which is in the range of 0.5-1%.
- Physical Delivery: Gold ETF allows you the option to redeem the Gold ETF Units in physical gold form, provided you hold a minimum of Gold ETF equivalent to 1 kg of gold.
- Lower return than Physical Gold: The additional charges attached to a Gold ETF such as brokerage, commission, or fund management fees required to manage the ETF may bring down the actual return generated by the ETF in comparison to physical gold.
- Subject to Market Risks: Due to economic factors and overall market outlook, the Net Asset Value (NAV) of the Gold ETF can go up or down.
How to invest in Gold ETFs?
Investing in Gold ETFs is quite simple. The first thing you need to do is select a fund manager from whom you will be purchasing the ETF. Gold ETF products are sold by various financial institutions and banks. Upon selecting your fund manager, they will purchase and sell the gold on your behalf. Once you purchase the ETF, the equivalent amount of gold units in terms of cash will be credited to your Demat Account.
Who should invest in Gold ETFs?
Gold ETFs are a good investment class for individuals looking to diversify their portfolios and hedge against a stock market fall. This will protect your portfolio in volatile market situations and help you to minimize your losses. Also, Gold ETFs are a good alternative to physical gold as they help save on additional costs and taxes.