You may have often heard your parents or grandparents refer to gold as one of the best investment options. They may have often advised you to purchase this commodity as it is one of the safest ways to store your wealth.
But, as a person living in the 21st century, you have a smarter option. It is more convenient to deal with and also has the age-old security which gold offers. They are gold ETFs. Find out everything about this financial asset by reading this blog!
What Are Gold ETFs?
As the name suggests, gold exchange-traded funds (ETFs) are passive investment schemes which deal with the commodity gold. These are passively managed funds with gold bullion as their underlying asset. These schemes aim to generate returns similar to domestic gold prices.
Each of their units represents 1 gram of pure gold having 99.5% purity, and you can purchase them either in paper or dematerialised forms. These mutual funds act as excellent alternatives to buying physical gold bars. When you redeem your gold ETF units, you receive the cash equivalent of your holdings at the current price of domestic gold.
Moreover, you can also get physical gold as per the ‘Creation Unit’ size in exchange for gold exchange-traded fund units. To do this, you need to own at least 1 kilogram worth of gold ETF units or multiples thereof. However, this benefit is only offered by a few AMCs.
How Does a Gold ETF Work?
When you purchase gold ETF units, a stock exchange authorised participant, or AMC, backs up your investment by buying physical gold of 99.5% purity in equal value. These entities are usually large-scale firms that handle the buying and selling of the commodity to generate ETF units.
These authorised participants or members make sure that the latest market values of gold are maintained while executing these transactions. Furthermore, constant control and trading by these participants keep the cost of gold ETF units the same as physical gold.
Why Should You Invest in Gold ETFs?
You can consider investing in gold ETFs if you want to enter a low-risk investment. They are a modern alternative to owning physical gold with higher flexibility and security. Investing in these schemes can provide exposure to your portfolio to the price and performance of gold without the hassles of actually physically owning the commodity.
Moreover, when you buy physical gold, there is no guarantee of its purity. But, in case of gold ETFs, each unit is backed by 99.5% pure gold bullion. Thus, you do not have to worry about the purity of the commodity while making your investment.
Apart from this, there are no making charges in case of gold ETFs. Such schemes also come with lesser associated charges in comparison to other mutual funds as they are usually passively managed. Additionally, you also get tax benefits in case you hold them for more than 36 months. Thus, gold ETFs can serve as an excellent option, even for new investors.
How to Buy and Sell Gold ETF Units?
You can buy and sell gold ETF units by following the steps mentioned below:
Step 1: Visit the website/app of your preferred brokerage platform.
Step 2: Open a trading and a Demat account.
Step 3: Browse through the available Gold ETFs, enter the number of units you want to buy and place your buy order.
After this, you will receive a confirmation mail on your registered mail as well as your e-mail id. Your broker will deduct a small service charge from your linked bank account.
Similarly, when you wish to redeem your holdings, you can place a sell order on the brokerage website or app. By doing so, you can trade your units at the prevailing market value of gold.
Before investing in gold exchange-traded funds, you should consider checking the scheme’s Net Asset Value, Assets Under Management and Expense Ratio. Moreover, you can also research the fund as well as the AMC’s performance in the last 5 years.
Some of the best Gold ETF schemes which you can invest in 2023 are Axis Gold ETF, IDBI Gold Exchange Traded Fund, Kotak Gold ETF, Invesco India Gold ETF and ICICI Prudential Gold ETF.
Advantages of Buying Gold ETF Units
Here are some of the major advantages of purchasing gold ETF units:
- Absence of Entry or Exit Loads
One of the biggest benefits of investing in gold ETFs is that they have no entry or exit loads. Thus, you do not have to spend anything extra while buying or selling units. Additionally, most of these schemes generally have low brokerage charges ranging from 0.5% to 1%.
- Ease of Trading
You can easily trade Gold ETF units in the cash segment of both the Bombay Stock Exchange (BSE) and the National Stock Exchange (NSE). Moreover, you can easily liquidate your holdings during trading hours, either through the ETF fund manager or the brokerage platform.
- Transparency
Gold ETFs reflect the value of domestic gold prices. Unlike physical gold, their rates do not vary across jewellery shops and different regions across the country. Thus, you can easily track the value of your investment, that too on an hourly basis.
- Available in Small Denominations
When you buy physical gold, you have to purchase it in standard denominations of 10 grams. However, in case of gold ETF units, you can start investing by purchasing a single unit. This feature makes this asset suitable for a variety of investors.
- Acts as Collateral for Loans
There are certain banks and other financial institutions which offer secured loans by accepting gold ETF units as collateral. This hypothecation process is more seamless in comparison to traditional assets.
- Excellent for Portfolio Diversification
Gold ETF units can be an excellent asset when it comes to portfolio diversification. Unlike equities, they do not go through significant price movements. This makes them suitable investments for hedging against market risk as well as inflation.
- No Risk of Theft
Unlike physical gold, these mutual fund units are stored in your Demat account. Thus, there is no risk of theft or damage. Furthermore, you do not have to bear any safety deposit charges.
Tax Implications on Redeeming Gold ETF Units
As per Section 112 of the IT Act, profits from the sale of gold ETF units are considered to be capital gains. If you redeem your units after holding them for 36 months or more, you would be required to pay Long Term Capital Gains (LTCG) tax.
Alternatively, if you redeem your investment before this time period, Short Term Capital Gains (STCG) tax would be applicable.
| Capital Gains | Holding Period | Tax Rate |
| LTCG | 3 years or more | 20% with indexation benefit |
| STCG | Less than 3 years | Applicable tax slab rate |
Conclusion
Physical gold has universal acceptance, involves no counterparty risks and can hold its value even in the event of a market crash.
But gold exchange-traded fund units are secure, have uniform pricing and provide a high level of liquidity and transparency. It is no doubt that in today’s time, gold ETFs are one of the best ways to invest in gold.
But, like any other financial security, they have some associated risks. Any micro or macroeconomic event which can affect gold prices may affect your return on investment from these assets. Thus, before investing, it is advisable that you assess the market conditions.
