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What is Gold ETFs and How Does it Work?

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Gold, the yellow metal has accumulated a great affinity amongst Indian consumers. The love for gold in India is such that it has secured the tag of the world's second-largest consumer of the jewellery metal, next only to China. For ages, investors look at gold as a go-to investment product.

What is Gold ETFs and How Does it Work?
 

Holding gold in physical form like coins, bars, jewellery has costs associated with it and hence it is a riskier as well as a costly affair. But holding the same in the paper form like gold exchange-traded funds (ETF) is a safer bet though ETFs prices come in closer to the actual gold price.

The current volatile situation of the global markets has left investors dizzy. In such a scenario, investing in gold is the best option as the yellow metal rose over 18% during 2019 and so far till date, the prices have hit a record high prices amidst ongoing coronavirus scare.

Let's understand in detail about the concept of ETFs and how it works?

What is ETFs?
 

What is ETFs?

The term ETF stands for Exchange Traded Funds and it is a commodity ETF which consists of only one principal asset which is gold. It aims to track the domestic physical gold price. The ETF acts as a passive investment instrument which is mainly based on gold rates and invest in gold bullion.

These exchange-traded funds act like individual stocks and are traded on the stock exchange similar to that of shares. But the fund holds gold derivative contracts and are backed by the yellow metal. So if an investor opts to invest in Gold ETFs, they will not be receiving the jewellery metal in any form. Instead, they as an investor will receive the cash equivalent.

Gold ETFs represent the units of physical gold which may be held in dematerialized or paper form.

One Gold ETF unit is equal to 1 gram of gold and is backed by the physical gold which has very high purity. Gold ETFs combines the flexibility of stock investment and the modesty of gold investments.

The inclusion of making charges, jeweller margin, storing costs and so on will make the physical gold costlier, on the other hand, the absence of these charges in case of paper gold i.e., ETF's, will reduce its prices.

The prices of ETFs surges or dips in sync with the prices of physical gold. They do not compromise on the purity factor and promises uniform availability across the country.

How Does Gold ETFs Work?

How Does Gold ETFs Work?

Price and Purity

The Gold ETFs are represented by 99.5% pure physical gold bars and are listed on the National Stock Exchange and Bombay Stock Exchange. It can be bought or sold by a stockbroker any time as per the convenience. Contrary to gold jewellery, these ETFs can be purchased and sold at the same price across the country.

Gold ETFs can be purchased in small amounts and are highly liquid which means it can be sold easily. In addition to this, the investor need not have to worry about theft as there will be no storage fee involved in it like bank locker fee and so on.

Investors who are looking to diversify their investments can go for ETFs as returns are guaranteed amidst market volatility.

These Gold ETFs are subject to market risks which impact the price of the yellow metal. Apart from this, gold ETFs are subject to SEBI Mutual Funds Regulations.

Please Note: Regular Audit of the physical gold purchased by fund houses by a statutory auditor is compulsory.

Advantages of Purchasing Gold ETFs

Advantages of Purchasing Gold ETFs

The following are the advantages of purchasing Gold ETFs:

  • They are listed and traded on stock exchanges.
  • ETFs can be purchased online and placed in demat account and hence it offers flexibility.
  • The purity of gold is guaranteed.
  • Each unit of ETFs is backed by the physical gold of high purity.
  • Pricing is done on a transparent basis as ETFs are priced based on real-time gold prices.
  • ETFs do not attract wealth tax, sales tax, security transaction tax, VAT charges.
  • Gold ETFs can be stored safely and securely in demat account and hence no fear of theft.
  • It is highly liquid and can be traded in stock exchange during the trading session at predominating prices.
  • Investors can purchase or sell gold ETFs in any denominations as per their convenience.
  • It is a tax-efficient way to purchase gold as income earned from ETFs are treated as long -term capital gain.
  • ETFs are accepted as collateral for securing loans.
  • It is easy to hold gold ETFs for a long time contrary to holding physical gold.
  • Gold ETFs do not involve making charges unlike jewels and hence cost-effective.
Where to Buy Gold ETFs?

Where to Buy Gold ETFs?

Gold ETFs can be bought from the National Stock Exchange (NSE) or Bombay Stock Exchange (BSE) through a broker using a trading account and demat account. An investor has to bear the brokerage fee and minor fund management expenses which will be applicable at the time of purchase or sale of gold ETFs.

Who can invest in Gold ETFs?

Who can invest in Gold ETFs?

Gold ETFs are suitable for investors who have an affinity to invest in gold but do not want to invest in the physical form of gold owing to storage problems, hesitation related to issues surrounding purity of the gold. Investors who are looking to get tax benefits can also invest in gold ETFs. The absence of making charges helps investors to save money if their investment is massive.

The opportunity to invest as low as one unit (1 gram) also draws many investors to choose gold ETFs over other forms of investment.

How to Invest in Gold ETFs?

How to Invest in Gold ETFs?

The Gold ETFs trade in stock exchanges (NSE and BSE), similar to equities of companies and can be purchased and sold continuously at market prices. All one needs is a trading account held with a share broker and a demat account. As per their requirements, investors can invest in gold ETFs either at regular intervals through systematic investment plans (SIPs) or can invest in one go by parking their lumpsum amount. Experts note that it is better to chalk out a plan and then invest systematically to reap the benefits.

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About the Author

Archana is a Content Writer at GoodReturns. She has been writing articles related to investment planning and personal finance for more than two years.

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