What are Gold Exchange Traded Funds and How Do They Work?

There is an infamous saying "There’s Something About Gold That Brings Out The Avarice Among Men" We have all read of the Californian Gold rush where people from all corners of the globe rushed to grab their gold. Most returned empty handed. We have also read of the gold hauls of SS Central America and SS Port Nicholson and millions of dollars spent on searching and recovering golden treasure from the depths of the ocean. Who has not heard of the legendary "El Dorado" a mythical city of gold or for that matter "King Solomon’s Mines". Closer home in our country we have read of the ancient treasures of Gold and the many empires where gold was so common it was sold in the market places. We were a great nation trading in gold for centuries and attracting a number of invaders who mounted campaigns against us due to their lust for gold. Haven’t we heard the saying "He Who Has Gold Rules Over All". I would like to remind all of you that the team of Financial Planners at IndianMoney.com are always there for you to plan your gold exchange traded funds needs in a most effective and efficient manner. You can explore this unique Free Advisory Service just by giving a missed call on 022 6181 6111.

What are Gold Exchange Traded Funds

We are after all the World’s largest gold importer and it is very necessary for us to know all we can about the Gold ETF. These are basically open ended mutual fund schemes which invest the money collected from investors in Standard gold bullion of 99.5% purity. The investors 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. Here a minimum of 1 unit can be purchased by the investor.

So How Do These Gold Exchange Traded Funds Work

Here a Gold ETF has its prospectus vetted by SEBI and collects funds from investors.Here these Gold ETF’s collect money from the investors and buy assets such as Gold, Debt or may retain a Cash component. They are in dematerialized form and units are issued to us Here a mutual fund house purchases gold from a bank. Here at current rates NAV of these Gold ETF may range from INR 2400-2600.An investor may purchase units say 1 gram, 10 grams or in kilograms. You need to have a demat account. Your purchased units are stored in dematerialized form or in your demat account. These are traded mainly bought and sold on a stock exchange such as the NSE. Here 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 .Here the custodians are responsible for purchasing and guaranteeing the purity of the gold. These also are 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.

See Also: Features of Exchange Traded Funds

Why Do Different Gold ETF’s Have Different Values

Shouldn’t I Go For The Cheapest NAV As I Can Procure Maximum Number Of Units

Here many people compare the last traded price of 1 gold ETF with another gold ETF and arrive at the conclusion that the cheapest NAV is the best fund to purchase. Here the last traded price depends on the NAV. Here NAV depends on the assets such as Gold, Debt and Cash owned by the Gold ETF. Here comparing one with the other does not serve a purpose. Here a cheap NAV is one which trades at a significant discount to its NAV.

Brokerage And Fees Involved in Gold ETF’s

Here a brokerage of 0.4%-0.5% is charged for each transaction of the Gold ETF. We have to pay annual maintenance charges for the demat account. Here the expense ratio in a Gold ETF can be around 1% of the amount and an extra 0.5% in case of fund of funds. Here the fund house incurs costs when it stores the physical gold with the custodian. This may translate to a range of 0.1-0.4% which is added in the expense ratio .Hence depending on the fund house the expense ratio may vary from 0.5-1.5% .There is no entry load only brokerage commission charged by the broker when you purchase units .Management costs up to a maximum amount of 1.5% held. No exit loads charged .Only a selling side commission. Here Gold ETF can put or maintain part of their gold holdings with banks and earn a nominal rate of interest. This means better returns for investors. Here Gold ETF’s in the year 2012 generated returns to their investors in the range of 10-11%.However the outlook this year is bleak as only 3-4% is expected as returns.. However with Gold One Never Knows...

Advantages Of Gold Exchange Traded Funds

Disadvantages Of Gold Exchange Traded Funds

Tax Implications Of Gold ETF

Here I would like to end this article by asking you to avail of this unique opportunity to invest and earn returns by using the Gold Exchange Traded Fund. No matter that the price of gold is now falling these funds gave stupendous returns in the period from 2008 to 2012.They exceeded the returns of most asset classes. Imagine if you had invested in Gold ETF in the year 2008.What would have been your returns at the end of 2012? "There Is Nothing Wrong With Men Possessing Gold .The Wrong Comes When Gold Possesses Men".