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Gold ETFs

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What are Gold ETF's?

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.

How do Gold ETF's work?

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.

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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.

Why invest in Gold ETF

Safety

Your physical gold bars, coins and jewelry can be stolen. Gold ETF stores your gold electronically. It cannot be stolen.

No Locker Charges

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.

 

Liquidity

You might find it difficult to sell your gold jewelry. You can easily sell even a single unit of a gold ETF.

 

High Purity

Your gold jewelry might not be of high purity. You can sell gold ETFs and buy gold of high purity.

 

Net asset value (NAV) of Gold ETF's

A Gold ETF owns:

  • Gold

  • Debt

  • Cash

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.

Expense

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.

Taxation of Gold ETF's

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.

 

Concepts & FAQ's Gold ETFs

What is a Gold ETF (Exchange Traded Fund)?

Gold ETF (Exchange Traded Fund) lets you own or invest in gold like one invests in stocks. Gold ETFs are also known as paper gold. Each unit of the ETF lets the investor own 1gm of gold without physically owning it. Owning Gold ETF also is cheaper than owning physical gold because it has no cost of storing physical gold. Also investing in a Gold ETF provides the benefit of liquidity (ready availability of cash) and one can trade any amount in it just like a normal stock.

Gold ETFs are Open Ended (no limit to the number of investors investing in it) mutual funds that help you invest your money in gold which is 99.5 % pure. These are listed on the stock exchanges and investors are assigned units of the mutual fund where each unit often represents one gram of gold. Note that there are ETFs where each unit can represent less than one gram of gold as well.

What is the requirement to invest in a Gold ETF?

Similar to how one needs to have a Demat Account to invest in shares and stocks, one need to have a Demat Account to invest or trade in Gold ETF.

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Frequently Asked Questions

What is an Exchange Traded Fund or ETF?

ETF are open ended mutual fund schemes, which are traded in a stock exchange like a share and seek investment returns that correspond to particular index like Nifty or an underlying asset like a gold.

What are Gold ETFs?

Gold ETFs are units representing physical gold, which may be in a paper or dematerialized form. These units are traded on the exchange like a single stock of company. Gold ETFs are intended to offer investors a means of participating in gold bullion market without the necessity of taking physical delivery of gold, and to buy and sell that participation through the trading of a security on a stock exchange.

Who can use Gold ETFs?

All types of investors whether retail or institutional, long term or short term, can use it to their advantage.

How are Gold ETFs better than physical gold?

Gold ETFs definitely score over physical gold, because they eliminate the hassles and drawbacks of physical gold (e.g. impurity risk), are more tax-efficient and allow you to invest in small amounts.

What is minimum investment for Gold ETF?

Minimum investment for gold ETF is one unit which is equals to 1 gm in most schemes, which is suitable for retail investor.

Are the Gold ETFs liquid enough?

Yes, since Gold ETFs are actively traded on exchange, one can easily liquidate ones position if there are adequate buyers in the market who are ready to buy at your offer price.

What are the advantages of Gold ETFs?

The investor has the advantages of owning physical gold, without suffering additional expenses and losses. These costs may be like making charges (for gold jewellery) and bank vault charges (for keeping coins or bars or jewellery). The investor does not need to worry about insurance and transportation either. Jewellers and banks charge premium and making charges on the gold sold. So, if investors purchased gold from the retail jeweller or a bank, it could have resulted in a straightaway loss of 5-20%. There are no concerns of quality- The gold backing the ETF is sourced from London Bullion Market Association approved refiners and stored in vaults. The investor need not worry about thefts the fund house takes care of all risks of storage and safety for a minimal expense ratio.

How to trade in Gold ETFs?

Trading in Gold ETFs is very simple. It is similar to how you trade in equity shares.

How to invest in Gold ETFs?

Gold ETFs are listed and traded on National stock exchange of India limited (NSE) and Bombay stock exchange Limited (BSE). They are held in demat form just like the stocks. You require a DEMAT account to invest in them. Besides, you also require a trading account with a broker (who should be a member of NSE).

What are the returns of Gold ETFs?

Returns of all Gold ETFs schemes are almost same and more or less similar to physical gold because they are passively managed fund

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