Gold ETFs are the exchange traded funds which invest in gold. Before moving further, let us understand what are ‘Exchange Traded Funds (ETFs)’.
Exchange Traded Funds (ETFs) are pooled investment securities like mutual funds but unlike the mutual funds, these can be purchased or sold on a stock exchange in a similar fashion like shares of companies. They operate like mutual fund and track a particular index, commodity or sector.
Gold ETFs represent physical gold but in paper or digital form. Instead of purchasing or selling actual gold, you can invest in gold in paper or digital form through gold ETFs.
Why to invest in ETFs and what are its benefits?
Seeing the Indian investor’s preference for investment in gold, these ETFs are a good alternative if your intention is to invest in gold only. There are many benefits of investing in gold ETFs, instead of investing in physical gold. Some of these are as follows:
- Investing in gold ETFs is more convenient then purchasing the physical gold. There are issues of safe storage with physical gold and you need not to worry for theft, robbery in case of gold ETFs. You might have to incur additional costs for keeping the gold in safe place like locker charges, etc.
- Gold is considered as a safe investment since ages and it acts as a hedge against inflation and currency fluctuation. So it actually provides diversification and stability to your portfolio.
- The price of gold may vary according to its purity or place where you are selling it but the price of gold ETFs is unaffected with these factors and they will give you same return irrespective of where you live.
- The gold ETFs can also be used as the collateral securities for the purpose of securing loans.
- You require a substantial amount of money to purchase gold as it is a costly commodity, while the gold ETFs may be purchased with a little amount of money also.
Features of Gold ETFs
Easy to Trade
Buying or selling gold ETF is very easy and you can do this in any exchange or through your stock broker also. There is no restriction on the purchase of quantities of these ETFs and you can even purchase 1 unit of these ETFs which is equivalent to 1 gram of physical gold.
No Risk of Theft or Robbery
Keeping the gold safely is always an issue. There is risk of theft or robbery with the physical gold and you may have to incur a cost to keep it safe, like locker rent, etc. In case of gold ETFs there is no risk or theft or robbery and you can invest in gold with peace of mind.
Cost- Effective
The gold ETFs are cost effective. You can purchase them with as little amount as available with you. You can even invest in 1 gram of gold by purchasing 1 unit of gold ETF which is not possible in case of gold. There is no entry or exit load which is there in case of mutual funds and the brokerage charges are also very less in case of gold ETFs (approximately 0.5 to 1 percent).
Transparency
You may face transparency issue in case of real gold. The physical gold you have purchased may have impurities in it or the charges of gold may vary seller to seller and according to place. ETFs are more transparent as compared to investing in physical gold. Similar to stocks and shares, gold prices on the stock exchange are available publicly. You can check the value of your portfolio by checking the prices of ETFs any time.
Tax Efficient
Gold ETFs are taxed similar to debt investments. You will have to pay short-term capital gains tax if you sell your gold ETFs before three years. Long-term capital gains tax is applicable on gold ETFs older than three years. However, you do not have to pay any VAT, wealth tax, or securities transaction tax. Thus, they are more tax-friendly than physical gold.
Disadvantages of Gold ETFs
Like every other asset class, there are some disadvantages of gold ETFs as well which are described below:
Less Returns as Compared to Physical Gold
ETFs are subjected to brokerages charges, fund management fee, etc. due to which they give us less return as compared to physical gold.
Price Volatility
The prices of ETFs fluctuate as per the economic fluctuations. The NAV (net asset value) of ETFs may vary according to many other factors as in the case of other asset classes like mutual funds or equities.
How to Invest in Gold ETFs
Select appropriate ETF
There are several gold ETF products available in the market which are being offered by banks and other financial institutions. You should carefully analyze the products and choose a good ETF which suits your requirements. You can then approach to you fund manager or stock broker who will purchase these ETFs form the exchange for you.
Open a DMAT account
Since the ETFs are now purchased in electronic form now a day, therefore, you will need a DMAT account to purchase the units of gold ETFs. You may open a DMAT account with your stock broker or fund manager and trade in gold ETFs.
Conclusion
Gold ETFs are good options for the investors who want to have exposure of gold asset class in their portfolio without directly investing in gold. There are many advantages of investing in gold ETFs like, less risk, easy trading, transparency, cost effectiveness, tax benefits while the disadvantages include price fluctuations, brokerage charges, etc. The investors should carefully analyze all the instruments in this category and take decision according to their portfolio. One must consider investing in gold ETFs as these act as a hedge against market volatility and provide diversification to your portfolio.
Also read: Indirect investment in Real Estate with small amount of money!
