What is Gold Exchange-Traded Fund (ETF):
Gold ETFs provided investors a means of participating in the 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 stock exchange. Gold ETF would be a passive investment; so, when gold prices move up, the ETF appreciates and when gold prices move down, the ETF loses value.
Gold ETF tracks the performance of Gold Bullion. Gold ETFs provide returns that, before expenses, closely correspond to the returns provided by physical Gold. Each unit is approximately equal to the price of 1 gram of Gold. But, there are Gold ETFs which also provide a unit which is approximately equal to the price of ½ gram of Gold.
Types of Gold ETF:
- Index ETF:
Most of the ETFs available today are index ETFs. This type of ETF tracks the performance of the index. This is done by including wither the contents of the index or having a sample of securities that make up the index. The two types of Index funds are “replication” and “representative” ETFs. Index ETFs that invest entirely in the securities underlying the index make up the replication ETF and those that invest most of the fund in representative samples and the remaining in other holdings (e.g. futures, options, etc).
- Commodity ETFs or ETCs:
Commodity ETFs, as the name suggests, invest in commodities, such as gold, silver, other precious metals. In-fact the first ever commodity ETFs were gold exchange traded funds. But commodity ETFs are index funds that track the non-security indices. Initially the commodities ETFs actually had the physical commodity itself. Now-a-days they have implemented the futures trading strategy.
- Bond ETFs:
Exchange traded funds that generally invest in bonds are called Bond ETFs. When the stock markets go through an economic recession, the bond EFTs is in demand. Unless brought and sold by a third party, the bond ETFs can give reasonable yields.
Why you need to invest in Gold ETF:
💡 Purity & Price:
There is no worry about ensuring gold purity as these funds are represented by 99.5% pure gold. Gold ETF prices are listed on the NSE website and can be bought or sold anytime through the broker. It is important to note that unlike jewellery, gold ETF can be bought and sold at the same price Pan-India.
💡 Hedge against inflation:
Gold is considered a safe investment because it can be used as a protection against currency fluctuation and inflation.
💡 Simple trading:
You need to buy a minimum of 1 unit of gold – equal to 1 gram of gold – to start trading in gold ETFs. Buying and selling the units works just like equities – you can trade through your stockbroker or ETF fund manager.
💡 Open trading:
Gold prices on the stock exchange are publicly available. You can check the gold prices for the day or the hour without any confusion.
💡 Easy transactions:
You can buy and sell gold ETFs at any time of the day – when the stock exchanges are open – from any part of the country. You will also not be affected by local price differences in gold due to VAT or other taxes.
Gold ETFs listed on the stock exchange have no entry or exit load for purchase or sale of units. You have to pay only around 0.5 to 1 percent as brokerage charges.
💡 Tax benefits:
Gold ETFs older than a year attract long-term capital gains tax. However, there is no VAT, Wealth Tax or Securities Transaction Tax on gold ETFs.
💡 Secure investment:
Gold ETFs are an easier investment than physical gold as there are no concerns over theft, secure storage or payments such as locker charges or making charges.
💡 Safe asset:
Gold prices do not usually fluctuate very heavily. Even if your returns on equities decrease, gold ETFs could prevent you from sustaining big losses.
💡 Portfolio diversification:
Gold ETFs are a good way to add diversity to your portfolio. Amid unstable market conditions, a diversified portfolio can give your better returns and reduces your risks.
💡 Loan collateral:
Your gold ETFs can function as collateral security if you want to borrow from financial institutions.
Factors of choosing the right ETF scheme:
The profitability of Gold Exchange Traded Funds schemes can be determined by looking at the investment profiles of the scheme. The main factors to consider are:
💡 Assets under Management (AUM):
AUM is defined as the market value of all the financial assets that a company manages for its investors. If a company has a high AUM value, it reflects on the high number of clients and portfolios that it handles.
💡 Net Asset Value (NAV):
NAV is the value of the company’s assets except the value of its liabilities. It is also the ETF’s per-share value. NAV is arrived at by dividing the total value of all the securities in a firm’s portfolio, except the liabilities, by the number of outstanding fund shares.
The profits or income made by an ETF scheme or portfolio is known as return.
Advantages of Investing in Gold ETFs:
- Potentially cheaper to have price exposure to gold price as compared to other available avenues
- Quick and convenient dealing through Demat account
- No storage and security issue for investors
- Transparent pricing
- Taxation of Mutual Fund
- Can be traded on stock exchange like buying / selling a stock
- Ideal for retail investor as minimum lot size to trade is one unit on secondary market
- NAV of a unit will track price of approximately ½ or 1 gram of gold
- Tax treatment of Gold ETF
The Gold ETF is classified under mutual fund and will be taxed as per non-equity mutual fund taxation rules. Investor investing in Gold ETF need not pay wealth tax. Investor has to pay taxes after redemption as per the tax laws applicable for non-equity mutual fund. But, when the Gold ETF is redeemed for physical gold the taxation rules will be similar to that of physical gold.
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