Gold ETFs – Features, Advantages, Difference between other gold investments

  • Akshatha Sajumon
  • Sep 13 2021
  • 7 minutes
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Gold ETFs are a type of commodity ETF (Exchange Traded Fund) that is available for investors in the Indian market.  Like any other ETF, gold ETFs can also be traded in the open market. These funds track the domestic prices of the physical gold and invest in gold bullion. Investors can purchase units that represent the physical gold in paper or Demat form. Each unit of ETF is equal to 1 gram of gold which is backed by the high purity of gold (99.5% pure physical gold bars). The price of gold ETFs is the same across the country unlike the prices of the physical form of gold which differ in every state.

 

Who can Invest in Gold ETF?

Investment in gold ETF is ideal for investors that want to invest in the commodity market, specifically gold, but also want to avoid risks associated with an investment in physical gold. Investment in gold ETFs also has some tax benefits that provide an added attraction for investment in this fund. The investors can avoid the incidental costs of investment in the physical form of gold like making charges, storage charges, purity issues, etc.

Moreover, it is ideal that every investor has a small amount of his/her portfolio invested in gold.

Features of Gold ETFs

Gold ETFs are listed on the National Stock exchange and Bombay Stock exchange for trading. Investors can buy and sell units of this fund easily like any other stock and can be redeemed for a cash equivalent of the physical gold. These funds have many features and benefits like ease of trading, transparency of holdings, etc. that make it an attractive and smart option for investment. Some of such features are discussed below.

  • Ease of investment and trading

Gold ETFs can be traded easily by opening a Demat account and a trading account. The investor can login to the online trading portal provided by the broker and trade in the gold ETF by selecting the same. These funds as mentioned above can be traded in real time like any other stock during market hours.

  • Transparency 

The prices of gold ETFs are the same throughout the country and are available publicly on the stock market. These prices make the trade quite transparent. Also, there are no hidden charges for trading in Gold ETF which may reduce the earnings of the investor. 

  • Reduced risk

The risks associated with an investment in gold ETF are quite low. Investment In gold ETF is in paper or Demat form so the cost of storage or risk of theft as in case of physical gold is totally avoided. Also, there is no concern about the purity of the gold as each unit of gold ETF represents 1 gram gold of 99.5% purity. These factors considerably reduce the risk for any investor so they can invest in gold ETFs without any hassles

  • Reduced costs

Investment in gold ETFs is quite cost-effective. As mentioned above, the costs like storage costs, making charges are eliminated in case of gold ETFs, and the expense ratio charged for gold ETFs is also very low. This provides the investors with high returns at lower costs. Moreover, these finds do not have any additional costs like entry or exit load as in the case of mutual funds.

  • Hedging against inflation

Gold provides for a perfect hedge against bad economic conditions. Over the past years, gold prices have been on a constant rise. This allows the investors to safeguard themselves against the losses on account of the volatility due to inflation or currency fluctuations. 

  • Taxation

The taxes levied on gold ETFs are lower as compared to investment in gold in its physical form. The taxes levied for gold in its physical form include wealth tax, VAT, sales tax. The taxes applicable for gold ETFs are long term capital gains which are comparatively lower than those levied on physical gold.

Comparison between Gold ETFs and other popular avenues of investment in gold

There are many points of distinction between gold ETFs and other forms of gold. Given below is a brief comparison between gold ETFs and other such forms.

Particulars Gold ETF Physical Gold  Gold Bonds
Form of investment Investment in Gold ETF is in paper or dematerialized form In this case, investors have to buy gold in its physical form Investors can buy sovereign gold bonds which are government backed securities.
Cost of investment The cost of investment of gold ETF is low as compared to other forms of investment Cost of investment in the physical form of gold has many added costs like storage costs, making charges,  The cost of investment in Gold bonds is relatively lower than the cost of investment in physical gold
Period of investment (Liquidity) Gold ETFs are a very liquid form of an investment where an investor can exit the funds at any point  Physical gold can also be considered as a liquid investment as it can be easily sold at any jeweler at the prevailing rates.  Gold bonds usually have a minimum lock-in period (minimum 5 years) where the investor can liquidate the bond only after the completion of the tenure
Income/ Returns The returns on gold ETFs are linked to the prices of the metal but there are no guaranteed fixed returns as in case of any security traded in the stock exchange Physical gold has no fixed returns or income generation Gold Bonds provide the investor with a fixed return of 2.5% per annum.

Most popular Gold ETFs

There are many gold ETFs available in the market for investors to choose from. Some of such popular Gold ETFs are mentioned below. 

  • Axis Gold Fund
  • SBI Gold Fund
  • Invesco India Gold Fund
  • Nippon India Gold Savings Fund
  • Aditya Birla SL Gold Fund

How to invest in Gold ETFs?

Investments in Gold ETF can be done like any other ETFs. You would need to open a Demat and a Trading Account with a broker of your choice with the regular KYC documents and start off investing in Gold ETFs.

Conclusion

Investment in gold has been traditionally favored in India and is considered to be a safer investment option. However, gone are the days when physical gold was the only option for investment in gold. Today there are many dynamic investment products related to gold like gold ETFs, gold bonds, gold mutual funds, etc. Gold ETFs are a relatively cost effective and safer investment option among such options and can provide steady returns to the investor.


Frequently Asked Questions

Is a Demat account and trading account mandatory for investing in Gold ETFs? Yes. Gold ETFs are securities that can be traded on the stock exchange like any other individual stock. For such trading, these securities have to be held in dematerialized form. Hence, a Demat account and a trading account are mandatory for investing in gold ETFs.

Does gold ETF provide better liquidity to the investors?
Yes. Gold ETFs like any other ETF can be traded on the stock exchange and can be bought and sold like any other security. Investors have the option to exit the fund at any point.

How can a person invest in gold ETFs?
An investor can invest in gold ETFs through any online trading portal provided by the broker or can directly call the broker to register their trade through offline mode.

What is the purity associated with each unit of Gold ETF?
Each unit of Gold ETF is of 1 gram weight and of 99.5% purity. 

Are gold ETFs actively managed funds?
No. Gold ETFs like any other ETFs in India are passively managed funds.

 

 

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