Why Invest in Gold through a Gold ETF?

Gold ETFs offer a convenient, demat-based way to invest in gold with liquidity, transparency, and diversification benefits, without the hassles of physical storage.

Portfolio diversification, among investors, is achieved by balancing stable investments with higher-risk ones. It ensures gains from one can balance the losses in another. One of the components of stable investment is gold, which offers protection against market volatility.

But the question arises, which form of gold to invest in? While buying physical gold is an option, there exist attractive alternatives too, like a gold ETF. If you are wondering what it is or questioning its considerability, here is the relevant information.

What Is a Gold ETF?

Exchange Traded Funds are the investment options that track an underlying index, security or asset and provide returns based on its performance. The indices tracked can include

• Equity indices: NSE Nifty50 or BSE Sensex

• Debt indices: SDL indices

• Commodities: Gold or silver

A gold ETF is a fund that invests in gold bullion and tracks the performance of physical gold prices. It provides returns according to the fluctuations. Gold ETFs are traded on stock exchanges, and investors can buy, sell and hold them in demat accounts.

How Gold ETFs Work?

Exchange-traded gold functions like a mutual fund where gold is the underlying asset. Investors can trade these units through stock exchanges, and the NAV of the ETF moves as per the changes in gold prices. Here is the stepwise format of how it works:

Step 1: Creation of Units

The mutual fund creates Gold ETF units as per the physical gold and lists them on stock exchanges like NSE and BSE.

Step 2: Buying and selling

Investors can buy or sell these units through a stock trading account. The units are held in a demat account.

Step 3: Price Movement

The value of the exchange-traded gold units changes based on the price of physical gold. However, the traded price in the stock market may slightly differ from the NAV due to demand and supply of ETF units. It is also influenced by the supply conditions of physical gold in domestic and global markets.

What are the Benefits of Investing in Gold ETFs?

Gold ETFs come along with certain advantages over other investment methods. Here is how:

• Easy Liquidity: Gold ETFs can be bought and sold easily on stock exchanges during market hours.

• No Storage Risk: Since gold traded funds are held in demat form, investors need not worry about locker charges, theft or storage.

• Assured Gold Quality: Gold exchange-traded funds are valued as per the physical gold of standard purity, which reduces the risk of impurity seen in physical gold.

• Transparent Pricing: The prices are linked to market gold rates and can be tracked in real-time.

• Portfolio Diversification: Gold traded funds help diversify investment due to distinct movements from stocks and bonds, thus reducing overall investment risk.

Gold ETF vs Physical Gold

Gold ETFs and physical gold differ in the following aspects:

Gold ETF and Gold Mutual Funds

Gold ETFs and gold mutual funds differ in the following aspects:

Taxation of Gold ETFs in India

Gold ETFs are treated similarly to fund not being an equity oriented mutual fund or a specified mutual fund.

• Long term-capital gains on Gold ETFs generally apply when the holding period is more than a year as the units of the fund are listed. It is taxed at 12.50%.

• If sold within a year, the gains are added to the investor’s income and taxed as per the applicable income tax slab rate.

Risks Associated with Gold ETFs

Gold ETFs carry interest rate, liquidity and credit risks.

• Interest Rate Risk: Gold prices are influenced by macroeconomic factors such as interest rates, inflation, and overall economic conditions. When interest rates rise, the demand for gold, which is a non-yielding asset, may decline. It leads to a fall in ETF values. Conversely, falling interest rates may support gold prices and improve returns.

• Liquidity Risk: It arises when there are insufficient buyers or sellers in the market. This may make it difficult to sell ETF units at the desired price or time, potentially forcing investors to sell at a lower price, thereby impacting returns.

• Credit Risk: Although gold ETFs primarily invest in physical gold, limited credit risk may arise due to the involvement of intermediaries or counterparties. Any uncertainty in their ability to meet obligations could indirectly impact the investment.

Who Should Invest in Gold ETFs?

Gold traded funds are suitable if:

• Considering investment in gold

• Have an active demat and trading account

• Are familiar with bid and offer prices

• Can manage costs and tracking differences within reasonable limits

How to Invest in Gold ETFs?

Here are the insights into the investment method in gold ETFs:

Choose the Investment Route

Gold ETFs can be bought and sold either in the primary market through an Asset Management Company (AMC) in creation unit size or in the secondary market through stock exchanges in units of 1 or multiples thereof.

Place Buy/Sell Orders on Exchange

Place the gold ETF orders through a demat trading account by specifying the number of units and price.

Select Order Type

Place a market order executed at the prevailing market price or a limit order executed only at the specified price level.

Order Execution and Settlement

Once executed, gold exchange-traded fund units are debited or credited to the demat account like stocks. Sale proceeds are settled on a T+2 basis and credited to the bank account.

Charges and Costs

Investors pay brokerage and demat charges. No Securities Transaction Tax (STT) is levied on buying or selling gold ETFs.

Conclusion

Gold ETFs offer a simple and efficient way to invest in gold without the challenges of physical ownership. They track gold prices, are traded on stock exchanges and provide benefits like liquidity, transparent pricing and no storage risk.

They eliminate purity and security concerns associated with physical gold. Gold ETFs also help diversify investment portfolios and reduce overall risk. Associated with clear taxation rules and easy accessibility, exchange-traded gold is suitable for cost-effective, transparent and flexible gold exposure.

Disclaimers:

The information herein is meant only for general reading purposes and the views being expressed only constitute opinions and therefore cannot be considered as guidelines, recommendations or as a professional guide for the readers. The document has been prepared on the basis of publicly available information, internally developed data and other sources believed to be reliable. Recipients of this information are advised to rely on their own analysis, interpretations & investigations. Readers are also advised to seek independent professional advice in order to arrive at an informed investment decision.

The Tax shown above is for illustration purpose and general information only. Investors are advised to consult their Tax Consultant or Financial Advisor to determine tax benefits applicable to them.

Source:

ECONOMIC TIMES,NISM,SEBI

Mutual Fund investments are subject to market risks, read all scheme related documents carefully.