fbpx

Gold ETF: What, Why & How To Invest

11

Gold has been one of the most popular investment for wealth creation for generations. Purchasing gold in the form of bars, coins, jewellery have been popular way of storing and passing on wealth from one generation to the other. However, in the 21st century, purchasing paper gold (Gold ETF) is the smartest way of investing your money in gold.

There is a slight price difference between gold ETF and physical gold due to the making charges and margins. But, if you prefer investing in gold rather than wearing it, gold ETF should be your first choice. Gold ETFs give you a chance to benefit from gold as an investment without suffering the risks and costs of handling physical gold.

What Is Gold ETF?

Gold ETF or Gold Exchange Traded Funds that are similar to open-ended mutual fund schemes. This fund primarily depends on the fluctuating cost of gold. You can purchase and sell Gold ETFs in the stock exchange market effortlessly. When it comes to jewellery, you have to pay certain additional charges, but the Gold ETF is slightly cheaper.

Above all, the gold asset is less volatile compared to other investment products. It gives you benefits of gold investments and stock trading as well. The value of Gold ETFs increases/decreases like physical gold. However, when you invest in ETF, you only benefit from the gold price without the worries of handling physical gold.

How Does Gold ETFs Work?

Gold ETFs are equal to 99.5% physical gold bars. They are represented on the National Stock Exchange (NSE). Unlike jewellery, you can buy and sell ETFs at the same price across the nation. Purchasing ETFs depends on your budget, and they can be sold without any hassle.

Above all, you don’t have to pay any security fees like bank lockers. Investors who prefer investing money in multiple products and diversify them can choose ETFs. Decent returns are always guaranteed despite market volatility.

Generating money from ETFs is similar to trading shares. When you purchase gold ETFs, you generate money through dividends. Above all, you earn revenue by selling units at a higher price. However, your investment and returns depend on the rise and fall in the gold market.

Therefore, your investment and returns entirely depend on the gold market and the National Stock Exchange. Like other investment products, ETFs are always subject to market risks that also impact the physical gold market.

Key Features Of Buying Gold ETFs

  • Gold ETFs Offer High Liquidity

In the stock market’s trading session, you often get the high liquidity of gold assets. The additional charges like government tax duty and brokerage fees are also less compared to other assets.

  • Availability To Use Exchange Platform (NSE)

With Gold ETFs, you can use the National Stock Exchange (NSE). It helps to maintain transparency during trading sessions. This thing is especially beneficial for new investors.

  • Easy Exposure To The Gold Market

When you have Gold ETFs, you get exposed to the gold market. The gold market is a transparent and profitable platform. As you know, they have high liquidity; you can trade them effortlessly.

  • Easy To Purchase

For purchasing physical gold, your pockets should be heavy. In simpler words, you need a good amount of money to buy any form of physical gold. The case is not the same in Gold ETFs. You have the freedom to decide your quantum and budget.

  • No Burden Of Wealth Tax

Gold ETFs are often tax-friendly. Whatever returns are generated are subject to the long-term capital gains tax. In simpler words, you don’t have the burden of VAT, sales, or wealth tax.

  • 24/7 Availability

When you make your mind for investing in ETFs, you don’t have to wait for the right time. Gold Bees or other different ETFs are available round the clock. Whether you have to exchange, trade, sell, or buy, do it as per your needs.

  • Purity

Whenever you think of buying physical gold, purity comes the first in your mind. One of the most important yet underrated benefits of gold ETFs is constant purity. There is no issue concerning the purity of ETFs. Every unit has the same price, similar to physical gold.

These were some of the key features of gold ETFs. You can only take benefits from these features when you invest in the right ETF.

Benefits Of Investing In Gold ETFs

  • Cost-Effective Investment Product

As you know, Gold ETFs have no relation to making charges and other margins. You can purchase them at national or foreign rates. However, the international stock market is highly volatile.

  • Gold ETFs Are Easy To Hold

Gold ETFs don’t possess any levy wealth tax like physical gold. You can preserve your Gold ETFs in the D-mat account. Therefore, you can hold your gold asset for a longer period.

  • Flexibility

With physical gold, you’ll be concerned about safety issues. But, Gold ETFs can be purchased online 24/7. You can also place them in your D-mat account without thinking about safety. Asset Management Company (AMC) is majorly responsible for trading them in the stock market. Above all, the Gold ETF in D-mat format is similar to physical gold.

  • Best Security Collateral

Unfortunate situations are always unpredictable in life. Like physical gold, you can also lease your ETFs. If you are borrowing money from any financial institution, you can use your ETFs as security collateral. The best part is that you’ll not face much hassle while leasing your ETF.

Guide On Finding And Buying In Gold ETFs

As you know, Gold ETFs are traded on the National Stock Exchange. You can purchase and sell them round the clock according to your convenience. You only need a D-mat and trading account with a stockbroker. Buying ETFs is very similar to systematic investment plans (SIP). You can either purchase in a lump sum or at regular intervals.

Following are the steps for buying Gold ETFs:

  • Initially, you have to open a D-mat and online trading account. Choose the right stockbroker for your investment products.
  • Login to your broker’s online platform by entering your username and password.
  • In the ‘Investment Products’ section, you’ll find different types of mutual funds, bonds, and gold assets. Choose the right Gold ETF units you prefer to invest in.
  • Now, choose the number of units you wish to purchase. Review all the terms and conditions before placing the ETF order.
  • After placing your order, the stockbroker will debit the amount from your linked savings account.
  • At last, your ordered units will be traded to your D-mat account within two days.

Risks Of Buying Gold ETFs

  • Limited Diversification

This investment product is not related to small-cap companies. Due to which investors are only limited to large-cap stocks in the market index. In simpler words, investors lose the growth opportunitiesoffered by small-cap companies.

  • Daytime Trading Sessions Are Highly Volatile

Long term investors prefer preserving their products for around 10-15 years. When it comes to gold ETFs, there are no chances of generating profits from intraday trading. Some investors will prefer conducting trading sessions during the closing time. However, the trades will not be much profitable.

  • Gold ETFs Can Be A Bit Expensive

Smart investors will always compare the prices of all the investment products. If you compare ETFs with other investment products, the costs are higher. You have to pay a specific commission to the stockbroker. But, you don’t have to pay management fees for any stock product.

The ETFs mostly follow a low-volume index. In simpler words, you can earn profits from other stock products than ETFs.

  • Slightly Expensive Than Physical Gold

Various fund houses provide different types of Gold ETFs. Choosing the right ETF for yourself is your personal choice. Check the fund expenses and charges before starting your investment.

Above all, if you incur an additional brokerage fee, the overall cost per unit will increase. However, gold ETFs are gaining huge popularity, and soon they will be highly profitable.

Gold Vs Gold ETFs

Purchasing gold or gold ETFs have their respective pros and cons. Choosing the best one for yourself depends on your financial goals and needs. Are you still confused about Gold vs Gold ETFs? Follow the below points to know the answer.

 Physical GoldGold ETFs
BuyingYou can buy certified or uncertified jewellery or certified coins and bars from banks and other authorised dealers.Gold ETFs are similar to physical gold with 99.5% purity. These are open-ended exchange-traded funds. The value depends on the market value of the yellow metal.
LiquidityYou can sell the gold coins and bars to jewellers, banks (if certified).
Selling jewellery could be difficult as there will be a huge negative price difference.
Buying or selling ETFs is far easier than physical gold.

You can sell Gold ETF units at the exchange the same as you buy.
Pricing & ValuationIt varies from jeweller to jeweller and making charges.Gold ETFs are transparent, and the price is based on global and domestic rates
Minimum InvestmentYou can buy small quantities but, smaller quantities of less than 10 gram would provide little liquidity. 10-gram gold of 98.5 purity can cost you around Rs. 50,000 at current prices (Sep 2020)The minimum investment in Gold ETF has to be equal to 1 Unit in the fund. 1 unit is equal to 1 gram of gold. Thus, you invest at 10% of the prevailing market price of gold. At current prices, it could be around Rs. 5000
Short & Long-term capital gainAccording to income tax rules, you have to pay short-term capital gain tax if you hold physical gold for less than 36 months.Any gains will count as short-term capital gain if you sell Gold ETF units within 12 months of purchase. After 12 months it’ll be a long-term capital gain and will receive indexation benefit
D-mat AccountNot requiredD-mat account is mandatory
CertificationCertificate expires after purchase, so if you are selling a certified gold coin or bar, you will need a new certificate of authenticity and quality.No need. The AMC will take care of certifications

In this 21st century, you should think beyond the bars, coins, and expensive jewellery sets. Though gold investment is one of the safest choices, you should think smarter. You cannot stick with the same ideas and decent returns.

Now, you should think about the gold products like ETFs. Therefore, to achieve long-term investment goals, start investing in other gold assets.

References:

AMFI India on Gold ETFs

Income Tax India – Tutorials on Long-Term Capital Gains

Income Tax India – Tutorials on Short-Term Capital Gains

You might also like More from author

Leave A Reply

Your email address will not be published.

This site uses Akismet to reduce spam. Learn how your comment data is processed.