Gold ETFs Explained: Benefits, Risks, How to Invest & More

Gold has always been a haven for investors and non-investors alike. You do not have to read Warren Buffett to understand why to invest in gold, as your mother’s gold investments can be a real-life example of how gold investments can help families during a crisis. Talking about mothers and their gold investments, it is mostly in the form of jewelry, and this is where the value of the actual gold diminishes and also makes it less liquid as an investment, apart from the other challenges like wear and tear, risk of theft, damage, and others. 

However, these challenges don’t make gold less important; it’s just the way you need to invest in it, and one of the best ways is via gold ETFs. Wondering what a gold ETF is or how you can invest in it? So, here in this article, you will read about every detail of how a gold ETF works, its benefits, gold ETF taxation, and all other aspects. 

What are Gold ETFs?

So, to begin with, let’s understand what is gold etf. A Gold ETF, like any other exchange-traded fund (ETF), which is the gold ETF full form, is an investment option that tracks an underlying asset that is Gold. The performance of the gold ETFs is dependent on how the underlying physical gold is performing in the market. 

Let’s get to the depth of gold etf meaning – There are fund houses that build gold ETFs for their investors by investing in physical gold in the form of gold bullion, mostly, and these gold assets are securely stored. So, investing in gold ETFs will take away the challenge of storing gold for the investors. For instance, you might have noticed that your parents visit the bank locker whenever they need some of their gold jewelry, don’t they? In India, keeping a significant amount of gold in physical form in your home is considered risky and challenging as well. 

With gold ETFs, the fund houses offering the ETF need to take care of how to store their gold investment, while you can enjoy the same returns that your physical gold can generate. 

Like all other ETFs, gold ETFs can also be traded as stocks/ securities on stock exchanges, and you can hold them in your Demat account as well. 

How do Gold ETFs work?

Gold ETFs are created by mutual fund houses. They buy physical gold as the underlying asset for the gold ETF units. Then these ETFs are listed on NSE and BSE for buying and selling at the stock exchanges by investors. 

You can buy them like any other stock you buy and hold them in your Demat account for as long as you want to generate your desired returns. However, you can also trade them on the stock exchanges as stocks. 

The gold ETF price is derived from the price of the underlying yellow metal. The Net Asset Value (NAV) of the gold ETFs will change as the underlying asset’s price changes, with some room for variation.  

Why You Should Invest in Gold ETFs?

The gold price has surged by over 150% in the past five years. During 2020, when everyone was shifting their investments to gold as it is the haven during a crisis, the price was around ₹48000 per 10 grams of 24K gold. That price has surged to around ₹132000 per 10 grams of 24k gold in India. The yellow metal has been rallying for all these years, and is still inching up, though there have been some instances of profit booking in recent times. However, it is not just the price rise or the return you should look at for investing in the best gold ETFs in India; here are the other reasons for investing in these ETFs – 

• Transparency & Purity: While buying physical gold or making jewelry from the yellow metal, you might not get the purity for which you are paying. The jeweler may hold information due to less transparency. However, with gold ETFs, you will get what you pay for. These ETFs are backed by 99.5% high-purity physical gold, which is securely stored. This keeps the entire investment transparent, and you get the best possible returns. 
• Easy to invest: If you have a Demat account, you can easily invest in gold ETFs just like you buy any other stocks from the market within the market hours. All you need to find a gold ETF that aligns with your investment goals, and then buy the number of units you want to purchase, and the same will be credited to your Demat account. 
• No Hassle of Storage: With gold ETFs, while you can enjoy the same return as physical gold generates, you do not need to worry about its storage, as that is taken care of by the fund house itself. 
• Cost-efficient: As there is no storage cost, your cost of investment reduces, optimizing your potential gains. Furthermore, there is no depreciation factor reducing the value of your gold investment. However, the most important thing is making charges, which are required when you buy gold as an investment, but in the form of jewelry. 
• Highly liquid: With physical gold, liquidity is a challenge. During emergencies, some families run miles to sell their gold jewelry, but with a gold ETF, if you ever need to liquidate your investment, you do not have to rush to any jeweler. All you need to do is click a few buttons, and your investment will be redeemed. As gold ETFs share price is just like any other share price, which is determined by the market, and you can trade it like a share when the market is open. 
• Helps in hedging: Gold has always been used as a hedge against market volatility as it has a low to negative correlation with the stock market, making it a perfect hedging instrument. 
• Can be used as collateral: Like gold loans using your physical gold, with gold ETFs also you can also get loans keeping the ETFs as collateral. 
• Bit-Sized Investment Possible: Often, people shy away from gold investment because of the price factor. But with gold ETFs, you can invest in gold even with ₹1000 and even more. 

Key Factors to Consider for Buying Gold ETFs

While gold ETFs are great for investing in gold without any hassle, there are certain factors you need to keep in mind before investing – 

• Expense Ratio: As ETFs are created by the mutual fund houses, there are certain charges, such as management fees, and others, which together are known as the expense ratio, like for other mutual funds. So, when you invest in gold ETFs, you must consider this cost. 
• Price volatility: Gold prices fluctuate due to multiple factors, especially economic conditions, geopolitical scenarios, and, of course, demand and supply at the basic level. 
• Align with investors’ agenda: You must align gold ETF investments with your investment agenda. While gold ETFs can be great for investment purposes in general, whether they are suitable for your portfolio or not, you need to analyze them before investing. 

How to Buy/Invest in Gold ETFs?

• Log in to the Shoonya app.
• On the dashboard, go to Watchlist.
• Tap the Search icon.
• Enter the name of the Gold ETF you wish to add to your watchlist.
• Tap the + icon — the ETF will then appear in your watchlist.
• Once it’s in your watchlist, you can proceed to place your order.

Taxation on Gold ETFs

Wondering how taxation of Gold ETFs works? Here are the details – 

• If you have redeemed the investment within 1 year, then it will be considered as a short-term investment, and any gains would be considered as short-term capital gains on which tax, as per your income tax slab rate % would be levied as per the new tax regime. 
• If you have redeemed the gold ETF investment post 1 year, then it will be considered as a long-term investment, and any gains would be long-term capital gains, subject to 12.5% tax without indexation benefit. 

Read About What is Silver ETFs

Conclusion 

It has always been the yellow metal that shines during tough times. With the gold price rally that has been taking place in the past years, the prices have certainly shot up drastically; however, the yellow metal has not lost its charm, rather it has become more popular. It is not just a metal used for gold jewelry anymore; gold ETF has one of the top investment vehicles in recent times. So, if you are planning to invest in gold, considering gold ETFs would be a great option. 

Gold ETFs | FAQs

Source: https://economictimes.indiatimes.com/

Disclaimer: Investments in the securities market are subject to market risks; read all the related documents carefully before investing.