Investors are suggested to have around 15% portfolio in gold investment because if the stock market crashes sometimes, the yellow metal will possibly save the investment basket. But where to invest in gold if you are not ready for physical gold jewelleries and want to invest only for good returns? The Gold Exchange Traded Funds (ETFs) can be a viably preferred option. Gold ETFs are just like other ETFs, only this one invest in gold bullion, while a unit of gold ETF is translated to the equivalent of 1 gram of gold - tracking the current market price of the precious metal. Hence the value of the ETF will rise and fall according to the market price of gold. The cost of one unit of gold ETF is also called Net Asset Value (NAV), like in other mutual funds.
Should you choose Gold ETFs?
Gold ETFs are purchased through the Demat account. Apart from the convenience of having gold virtually, an investor should always look out for other benefits of gold ETFs, because in the market there are few other transparent and virtual gold options too, like - digital gold, and Sovereign Gold Bond (SGB) by the RBI. So what are the exclusive benefits of gold ETF that one should opt for it?
ETFs are passively managed funds, as an asset management company will be there to manage the fund, and the investor will have to bear expense ratio, just like mutual funds. But Gold ETFs have a lower expense ratio up to 1% (or mostly less), rather than other funds. Gold ETFs are highly liquid funds, any time an investor can translate the ETF into liquid money. There is no 'exit load' in gold ETF, the investor can sell the ETF any time without worrying about the extra fee levied.
Investing in gold ETF means investing in 99.5% pure gold, virtually. The whole money doesn't need to be put into physical gold, rather the money can be poured into RBI's Gold Monetization Scheme (GMS), or into the stocks of mining or gold companies. So, the money will float around any gold-related fund and will be determined by the current gold prices. You can also apply for physical delivery of the gold if you are holding a minimum of 1 kg gold. However, when somebody is choosing ETF, it is generally expected that a load of physical gold is sought to avoid.
However, a short-term capital gain will be taxed on the investor if the gold ETF is sold before 3 years, and in case of more than 3 years, the long-term capital gain tax will be charged, which is 20% tax and 4% cess with indexation benefits.
However, you can think, rather than buying gold ETF units from the Demat account, one can simply buy digital gold from Google Pay or PhonePe. But in a gold ETF, you might have to bear the minimum expense ratio of less than 1%, but in the case of digital gold, you will have to pay 3% GST and 3% additional spread cost at the time of buying, which you cannot redeem at the time of selling. Thereby, the extra cost for gold ETF is far less than digital gold. But the minimum investment amount in gold ETFs is higher than the other one. If you can bear a bigger amount of investment for the fund, the benefits of gold ETFs are far ahead of digital gold.
How to buy?
Gold ETFs can be bought through a Demat account and traded on the National Stock Exchange (NSE) at the current market price, just like other company stocks. After logging into the account, search Gold ETF options and select a fund. Then place the order and do the payment through the linked bank account. After the processing time, the units of gold ETFs will be credited to the Demat account.
This is called the direct Gold ETF option, bought through the Demat account. However, one can also invest in gold funds and not in direct gold ETF. It can be purchased from the regular mobile application used for mutual funds, not directly through the Demat account. Even in that case, the money will be traded in the same product, just in a different way. The expense ratio, exit load along with some other factors will be different in that case.
From where to buy?
There are multiple gold ETFs options available in India like Nippon gold ETF, SBI gold ETF, HDFC gold ETF, Axis gold ETF, Kotak gold ETF, etc., to name a few. But as we know, gold ETF prices are determined by the current gold prices, then how to choose from these options? Here comes the notion of which organization has a better Asset Under Management or AUM, which means the total invested amount indicating better liquidity. In the Demat account, you can browse the gold ETF option to find out the AUM of different organizations. You can simply write out the organizations with lesser AUM and select the one with higher AUM. The Nippon gold ETF, SBI gold ETF, HDFC gold ETF are the top 3 options preferred by investors because of their higher AUM.
SBI gold ETF is quite a popular fund in India with a total fund size of Rs. 2353.89 crore. As of September 9, 2021, the gold ETF NAV was quoted at Rs. 4201.24, with an expense ratio of 0.51%.
To conclude, the obvious question should be addressed - why should one choose gold ETFs over other general ETFs? There are certain ETFs (in Sensex ETF and Nifty ETF) that are based on the performances of Sensex and Nifty. The clear answer to defend gold ETF is to diversify your portfolio and keep a hedge - the very first point where we started the discussion. Although, the investor should remember that the gold market is a very volatile one in short term, but is profitable on a yearly or long-term basis. So, one should have that risk appetite to invest in any kind of ETF, like a gold ETF.
Gold market prices have towered record high since the last year when the pandemic hit. But at the present situation in September 2021, prices are a bit subdued than the previous rates. Gold rates in the international market are denominated by the US dollar. In the upcoming few months, if the US Fed does not start tapering, the gold prices are anticipated to rally up again. But if the Fed starts tapering, gold prices will be dragged down. It is all under consideration now. Hence, to diversify the investment portfolio in the safe haven, with a comparatively lower market price, now or in the upcoming quarter investors can choose gold ETFs, expecting good returns in long term.