Gold ETF: Meaning, Types, How to Invest and Works

In India, Gold is not just a cultural heritage but also one of the most trusted forms of investment. Through the ages, this alluring metal has been a symbol of wealth, safety, and a haven when times seem uncertain.

There are numerous ways to invest in Gold in India, online and offline. While you can buy gold jewellery, gold bars, and gold coins offline, gold mutual funds, Sovereign Gold Bond schemes, and Gold ETFs fall under online investments.

What is a Gold ETF?

A Gold ETF, or Gold Exchange Traded Fund, is a type of commodity-focused mutual fund that invests in gold in the domestic market. Each Gold ETF unit is equivalent to 1 gram of gold and is traded like equity shares on the stock exchange.

Gold ETFs simplify investing in gold by bringing the convenience and liquidity of stock trading. In short, a Gold ETF allows investors to own gold in electronic form, eliminating concerns about purity, safety, and storage.

Features and Benefits of Gold ETFs 

In the digital age, Gold ETFs offer investors the benefits of gold ownership without the hassles of physical storage. Here are a few features and benefits of Golf ETFs. 

Flexibility

You can buy Gold ETFs online through your Demat account. They are traded on stock exchanges by the asset management company (AMC), allowing you to buy or sell them at any time during market hours. 

Gold ETFs mirror the price movements of physical gold, offering returns comparable to those of physical gold without the need for physical storage.

Liquidity

Gold ETFs offer high liquidity since they can be bought or sold on the stock exchange during market hours at the current market price. Transaction costs, such as brokerage and statutory charges, are also lower than those for buying physical gold.

Less Investment

Buying physical gold from a retailer usually requires a higher investment. With gold ETFs, you can invest in smaller denominations, giving you the flexibility to choose how much you want to buy or sell.

Easy Market Access

Gold ETFs offer transparent, reliable, and secure exposure to the gold market, with high liquidity, as units can be bought or sold instantly on the National Stock Exchange (NSE) without any hassle.

Long Term Holdings

Gold ETFs are stored securely in your Demat account, eliminating concerns about storage and safety. This makes it convenient to hold them for as long as you wish.

Tax Efficiency

They offer a tax-friendly way to hold gold, as returns from Gold ETFs are subject to long-term capital gains tax. 

Ease of Transactions

Gold ETFs are listed and traded on the stock exchange and can also be pledged as security for secured loans. Transactions are quick and seamless, with no entry or exit load, meaning you don’t incur extra charges when buying or selling. Hence, brokerage fees are typically only about 0.5% to 1% of the transaction value.

Cost-effective

Gold ETFs do not incur making charges like physical gold in the form of jewellery or bars. They are purchased at market-linked international prices, meaning there is no additional markup.

Risk factors

Like equity mutual funds, the NAV (Net Asset Value) of a Gold ETF can rise or fall based on market movements. Additionally, expenses such as fund management fees affect overall returns.

How do Gold ETFs Work?

Before investing in gold ETFs, it is essential to understand how they work. Gold ETFs function similarly to mutual funds, but instead of stocks and bonds, they invest in physical gold. 

1. The AMC buys physical gold and secures it in vaults.
2. Investors buy units of the ETF, each representing 1 gram of physical gold.
3. The NAV (Net Asset Value) of the ETF moves with market gold prices.
4. Investors can buy or sell units at any time on the stock exchange.

Here’s a simple example to explain it:

Suppose you want to invest ₹15,000 in a Gold ETF. You can buy units of the fund through a stock exchange using your trading and Demat account. If one unit costs ₹5,000, you can purchase three units for ₹ 15,000.

As gold prices fluctuate, the value of your ETF units does too. Your investment grows when gold prices rise and may be reduced when prices fall.

When you want to exit, you can sell your Gold ETF units on the stock exchange during market hours, just as you would sell shares.

Gold ETF Taxation in India

Even though gold ETFs are traded on exchanges, they are not considered equity. Instead, they are considered as physical gold and taxed as such. 

If you make a profit by trading Gold ETFs, you will have to pay capital gains tax, regardless of whether your investment was long-term or short-term. 

The long-term capital gains period for gold ETFs is 12 months, and they incur a tax of 12.5% without indexation. The short-term capital gains tax is 20%. 

How to Invest in a Gold ETF

Here’s a simple step-by-step process to start investing in Gold ETFs:

Step 1: Open a Demat account and a trading account online by submitting PAN, ID proof, and residential proof

Step 2: Choose an ETF by comparing expense ratios, tracking errors, and liquidity. There is also an option to choose mutual funds with an underlying gold ETF.

Step 3: Place an order for specific units of the ETF. You can buy it all at once or invest in it as an SIP.

Step 3:You get a confirmation sent to your email and your phone

Step 4: A nominal amount for brokerage will be deducted during the transaction

Digital Gold vs Gold ETF: What’s the Difference

Digital gold and Gold ETFs represent digital investments in gold, but they differ in terms of accessibility, liquidity, and other factors.

Things to Consider Before Investing in Gold ETFs

If you want to invest in gold ETFs and need to find answers to how to invest in gold ETFs, here are some pointers you might find helpful:

• Gold typically delivers around 10% annual returns over the long term, making it a more suitable investment for short- to medium-term horizons.
• If you plan to invest a significant amount or trade frequently, Gold ETFs are usually more cost-efficient than other gold investment options.
• Don’t pick a Gold ETF solely based on low fees. Review its past performance and check how closely it tracks gold prices.
• Track gold price trends to buy at lower levels and sell as prices rise, a strategy similar to those used in stock trading.
• Limit gold investments to 5-10% of your portfolio to maintain diversification and steady returns.
• Compare brokerage and commission fees, and choose a broker or fund manager with reasonable charges.
• Regularly monitor your account and trades, and ensure a fund manager oversees your Gold ETF to improve portfolio effectiveness.
• Gold ETFs are regulated by SEBI and backed by physical gold, providing investors with security.

In Summary,

A Gold ETF is a smart way to invest in gold digitally with safety, liquidity, and tax efficiency. Backed by SEBI regulations and offered by leading fund houses, it provides a transparent and convenient route to investing in gold. Use Gold ETFs as a hedge against inflation and a portfolio diversifier, not as your primary investment, making them a balanced addition to a modern investment strategy.