As good as gold – Gold ETFs and why they’re a good investment option

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As good as gold – Gold ETFs and why they’re a good investment option

May 14, 2021
As good as gold – Gold ETFs and why they’re a good investment option

Akshaya Tritiya is a day of looking forward – to joy, to prosperity, to better days. Gold is bought as a sign of good luck, and with the belief that it will multiply and fill homes with prosperity. This year, many of us will be spending this festival indoors and with limited access to retail jewellery stores. But, don’t let this dissuade you from investing in gold.

Gold is a wise investment. Its value shines through when economies slip and stumble because it acts as a hedge against inflation and currency fluctuations. This year, instead of investing in physical gold, opt for the electronic route by investing in Gold ETFs, or gold Exchange Traded Funds. These intangible assets are just as, and in fact more valuable, than the tangible commodity. Read on to find out why.

What’s the Funda?

Gold ETFs are a type of security that derives its value from physical gold. In other words, this precious yellow metal is the underlying asset upon which the price of Gold ETFs is based. Purchasing Gold ETFs is akin to investing in gold, only here, you’re doing it electronically. Just like shares, Gold ETFs can be traded on the stock market. You can make good returns by keeping a watch on gold prices (which is publicly displayed on the Stock Exchange) and buying and selling Gold ETFs accordingly.

The unit price of a Gold ETF is linked to 1 gram of 24K gold or gold of 99.5% purity. To trade, you need to purchase a minimum of 1 unit of gold, which is equal to 1 gram of gold. You will also need to open a demat account through which you will buy and sell Gold ETFs. Trading happens in the form of cash, and not gold. You can invest in ETFs via a stock broker or fund manager.

Why Gold ETFs and not gold

As a nation, we love our gold and it is a popular investment asset. However, on certain fronts, Gold ETFs will have the upper hand. For one, with Gold ETFs, you won’t have to worry about the safety of your gold or pay storage charges to keep it secure. When it comes to the commodity gold, there is the risk that it might be impure; plus, the price of gold differs from dealer to dealer. With ETFs, you can be assured of price transparency and uniformity. With Gold ETFs, you also don’t have to worry about wealth tax or making charges (1% wealth tax will be levied if you own gold exceeding Rs 30 lakhs).

Are Gold ETFs suitable for me?

Gold ETFs are a great investment option for those who want to benefit from the fluctuations in gold prices, but don’t want to be bogged down by owning gold in its physical form. It’s also good for those who like the freedom to apply their own mind and methodology to their investments. This is because Gold ETFs can be traded on the market at any time during market hours. You’re not restricted by SIP constraints or a lock-in period of any kind. Neither do you have exit load fees (a fee charged by fund houses for exiting a scheme before term) while selling Gold ETFs.

How gold ETFs glam up your portfolio

  • Gold ETFs can be purchased and sold with ease. So, they offer a good amount of liquidity.
  • They are not as risky as equity funds, as gold rates aren’t as volatile as stock prices. So, your Gold ETFs can protect you against probable losses in equity.
  • Gold ETFs bring diversity to your portfolio and offsets market risks.
  • They can be offered as security collateral on loans.
  • These are more economical investments as there is no entry and exit system for gold ETFs. This means you don’t have to pay fees for buying or selling units (you do have to pay brokerage fees, though).
  • Gold ETFs have benefits on the tax front as well. If held for over a year, they attract a Long-Term Capital Gains Tax of 20%. Short-term gains are taxed as per your income tax slab. However, there is no VAT, wealth tax or Securities Transaction Tax levied.

Do Gold ETFs have an edge over Gold Mutual Funds and Sovereign Gold Bonds?

Each of these investment options have pros and cons of their own. When it comes to liquidity, Gold ETFs rank the highest. SGBs, which are government certificates issued against grams of gold, have a lock-in period of 5 years, whereas selling of Gold Mutual Funds are constrained by SIPs. However, capital gains on SGBs aren’t taxed; plus, you get an additional fixed interest rate of 2.5% per annum.

Gold Mutual Funds derive their value from Gold ETFs. If you like a more disciplined approach to investing, fund houses offer SIPs through which you invest in Gold Mutual Funds. However, if you want to redeem Gold Mutual Funds before term, you might have an exit load. Also, they cannot be traded on the market, so your returns will be based on the Net Asset Value of the fund house that day.

Suggestion: Experts advise that gold shouldn’t take up more than 5-10% of your portfolio as gold prices tend to remain static over long periods of time. You can always adjust this allocation depending on the economic growth of the country.

Now that you know all about Gold ETFs, invest in them this Akshaya Tritiya. Take the first step towards a shining financial future!

R. Kalyanaraman
by R. Kalyanaraman

Chief Executive Officer

I am a sales guy at heart with utmost willingness to listen to people – customers, employees, competitors et al. Nothing gets me a bigger adrenaline rush than an interesting conversation with my customer!