Commonly referred to as paper gold, they are basically open ended mutual fund schemes, which invest the money collected from investors, in Standard gold bullion of 99.5% purity. The investor's unit holdings are listed on a stock exchange. These do not require any active management and are passively managed and provide returns, in lieu of the physical gold in the spot market. A minimum of 1 unit can be purchased by the investor.
A Gold ETF has its prospectus vetted by SEBI and collects funds from investors. These Gold ETF's collect money from you and other investors and buy assets such as Gold, Debt or may retain a Cash component. They are in dematerialized form and units are issued to you. The mutual fund house purchases gold from a bank.
You need to have a demat account. Your purchased units are stored in dematerialized form in your demat account. These are traded, mainly bought and sold on a stock exchange, such as the NSE. The units can be easily converted into cash. These funds usually track the price of physical gold in the international market such as London Bullion Market. The custodians are responsible for purchasing and guaranteeing the purity of the gold. They are also responsible for the custody of the gold. This gold is 99.5% pure and is generally called 24 karat gold. This gold is fully insured and is not used for lending.
Your physical gold bars, coins and jewelry can be stolen. Gold ETF stores your gold electronically. It cannot be stolen.
Your physical gold needs to be stored in a locker at a bank. You have to pay locker fees. No locker fees for gold ETF.
You might find it difficult to sell your gold jewelry. You can easily sell even a single unit of a gold ETF.
Your gold jewelry might not be of high purity. You can sell gold ETFs and buy gold of high purity.
A Gold ETF owns:
The combined value of all these assets, divided by the number of units in the gold ETF, give you the NAV of the gold ETF.
A Gold ETF has expenses which are paid by selling the gold holdings and also from income from the debt funds. This means the value of I unit of a Gold ETF, is slightly lesser than the price of physical gold.
Gold ETF's are taxed just like a debt fund. Short term capital gains (gains under 3 years), are added to your taxable salary. Taxed as per income tax slab you fall under. Long term capital gains (gains over 3 years), are taxed at 20% with indexation.
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