Gold ETFs – Features & Benefits, Investment Process, Tax Efficiency

For centuries, Indians have had a strong affinity for gold. However, it was only in the year 2007 when India launched its first Gold ETF (Gold BeES). The underlying asset of these ETFs is gold. Also, Gold ETFs gives you exposure to the Indian gold market.

Gold ETF or Gold Exchange Trade Fund

Gold Exchange Traded Funds, or Gold ETFs are open-ended mutual fund schemes based on the ever-fluctuating cost of gold. The physical gold, on the other hand, does not generate an income. Also, the making charges on physical gold is high. Gold ETFs give investors exposure to the gold market. They are an excellent choice of investment for investors looking to beat inflation in the long-run.

Moreover, gold as an asset is less volatile when compared to equities. 1 Gold ETF unit is equal to 1 gram gold. So, it gives you the dual benefit of stock trading as well as gold investments. Some fund houses capitalise on gold bullion, and hence, they need to keep a close watch on the market performance. The value of Gold ETFs increases/decreases proportionally with the price of physical gold. Not only do they not compromise on purity but also promise a uniform availability across the country.  

Who should invest in Gold ETFs

Gold ETFs are suitable for investors who are looking to diversify their portfolio with exposure to the gold market. It is a low-risk investment which suits conservative investors. The money invested goes towards standard gold bullion of 99.5% purity. Gold ETFs are a low-risk investment even if traded in the stock exchanges. Individuals who do not wish to spend money on storage and additional taxes such as in the case of physical gold can also opt for gold ETFs.

Features & benefits of Gold ETFs

Flexibility

Gold ETFs can be purchased online and placed in your Demat account. The asset management company (AMC) is responsible for trading them on a stock exchange. Meaning, you can enter/exit whenever required. Even in the Demat format, gold ETFs behave the same as physical gold.

Liquidity

Gold ETFs offer high liquidity as they can be traded in the stock exchange during a trading session at the prevailing price. Also, the transactional expenses (broker fee and govt duty) is less than that of physical gold.

Smaller denomination

Approaching a retailer will need a large amount of money to purchase gold. However, in the case of gold ETFs, you have the advantage to decide the quantum you wish to buy and sell.

Ease of participation in the gold market

With gold ETFs, investors acquire exposure to the gold market – a transparent, profitable and safe platform. Also, they come with significant liquidity as gold can be traded instantly without any hassle.

Easy to hold for long

Gold ETFs do not levy wealth tax on Gold ETFs as opposed to physical gold. Storage (in demat account) and safety are no issues either. Hence, you can hold on to your ETFs for as long as you want.

Tax-efficiency

They offer a tax-friendly means to hold gold as the returns generated from Gold ETFs are subject to long-term capital gains tax. However, there will be no additional burden of sales tax, VAT, or wealth tax.

Use of exchange platform (NSE)

Gold ETF investors can use the stock exchange platform – National Stock Exchange (NSE) – to keep transactions and trade transparently.

Ease of transaction

Aside from listing and trading on the stock exchange, you can also use it as security for secured loans. Transactions are quicker and seamless with zero entry and exit load.

Cost-effective

Golf ETFs do not attract making charges like physical gold in the form of ornaments or bars. You can purchase it at international rates. Hence, there will be no mark-up at all.

Risk factors

Like any equity fund, the NAV or Net Asset Value of a gold ETF can go up or down as per the market trends. Similarly, the extra expenses like the fund manager’s fee and others can impact the returns.

How Gold ETFs work

Physical gold supports Gold ETFs as security at the back-end. For instance, when you buy a Gold ETF, the person or entity at the back-end is purchasing gold. They give guarantee to the investors about the purity of gold too.

For instance, the Gold BeES which is registered on the NSE (National Stock Exchange) meticulously follow the latest market cost, called spot prices of gold. NSE allows an ‘Authorised Participant or Member’, generally large companies/firms to handle the purchase and sale of gold to generate ETFs. Constant trading and control by the ‘Authorised Members’ ensure that the cost of gold and ETFs remains the same.  

How to invest in Gold ETFs

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

Step 2: Select a Gold ETF and order one. There is also an option to choose mutual funds with an underlying gold ETF

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

Gold versus Gold ETFs

ETF	Gold
It is a form of investment	Idle wealth
For a short-term or long-term financial goal	Personal use, loan collateral
No need to store. Hence, no risk	Must be stored away safely
Same value as that of physical gold	Subject to market rate fluctuations
Traded on the stock exchange	Purchased from a retailer/jeweller
Fund management expense (expense ratio)	High making charges

So, if you choose gold as something to invest for long-term, then it is time to think beyond bars, coins, and ornaments and capitalise on innovative gold products like Gold ETFs.