Gold ETFs - Meaning and Reasons To Invest

Buying gold is an age-old Indian investment practice. Today, the precious metal is still highly sought after, but more investors are opting for gold ETFs. The gold ETF prices are similar to physical gold, and both share common benefits. 

 

However, the only drawback is the non-wearability. Keep reading to know more about gold ETFs, their properties, benefits, and investment suitability.

An ETF or ‘exchange traded fund’ is traded on the stock exchange like individual stocks. You can define gold ETFs as commodity-based traded funds investing exclusively in physical gold. This can be either in dematerialised or paper form, traded as units. 

 

The prices will be similar to physical gold. Once traded, the investor receives the unit’s equivalent in cash instead of the metal.

The underlying asset of a gold ETF is actual, tangible gold, and the value of the ETF depends on the ever-fluctuating gold prices. In the form of units, you hold gold investments without any associated costs or risks. 

 

One unit in a gold ETF represents 1 gram of 99.5% pure gold. The purity of your gold investment is guaranteed at all times and it earns you income, unlike idle stored gold jewellery. 

 

Gold ETFs also give investors exposure to the gold industry, which has multiple investment facets, including mining, manufacturing, transport, and more. 

 

Moreover, you can use gold ETFs as defensive assets while gaining from the climbing and falling interest rates. When included in your investment portfolio, these funds can protect it against inflation in the economy, providing a certain measure of stability. 

There are several benefits of investing in gold ETF funds instead of storing physical gold. These are:

• Liquidity and Transparency

You can buy and sell gold ETFs, just like any other equity-based fund, during trading hours. This makes it extremely easy to liquidate these funds in case of emergencies. Also, there is no hassle regarding prices while buying or selling as these are publicly available on the stock exchange.

 

Moreover, there are no entry or exit loads on trading gold ETFs.

• Use as Collateral

You can submit your gold ETF investment as collateral against a secured loan with any lender. This grants it a dual purpose in your investment portfolio and negates the need to submit other assets. 

• Cost Effective

While buying physical gold, you must shoulder the making charges as per the jeweller. Once you buy your gold, you need to invest time and energy into finding safe storage, usually a bank locker or safe in your house. 

 

Both these options increase the total cost you incur. This is completely eliminated by investing in gold ETFs. 

• Low Risk

Usually, gold prices do not undergo substantial fluctuations, and remain fairly steady throughout the year. This allows these funds to yield better returns than equities, which are quite volatile compared to the gold market.

As with any other investment, a certain degree of risk is associated with investing in gold ETFs. 

 

This is mainly the associated market risk. Like with any other equity-based fund, there is always a risk of fluctuation in the Net Asset Value (NAV) of gold ETFs. 

 

Gold prices react to market movements, exposing your investment to the risk of losing value. Moreover, extra expenses such as the fund manager’s fee and other charges can further impact the returns.

Here are a few things you need to keep in mind before investing in gold ETFs instead of gold:

• Tax Implication

Gold ETFs bought till March 31, 2023, are treated like physical gold. If the holding period is less than 36 months, a short-term capital gains tax is applicable at the respective tax slab. For holding periods exceeding 36 months, a long-term capital gains tax of 20% is levied with indexation benefits.

 

However, gold ETFs purchased after March 31, 2023, will be taxed as short capital gains, irrespective of the holding period.

• Useful for Hedging

Gold ETFs offer investors the benefit of protection against changing market cycles. This means that these can take the place of insurance in your investment portfolio. Moreover, gold ETF prices rise in sync with a fall in the currency value. 

 

By investing in gold ETFs, you stand to earn profits from this value drop. 

• Gold Ownership

While you own units equivalent to the value of gold, you cannot exchange a gold ETF for actual gold. This implies that you do not actually own tangible gold while investing a proportional value as a bunch of stocks.

Gold ETFs are a good investment option for investors interested in gold but do not want the hassle of managing physical gold. These pose suitable investment options for slightly conservative investors, as the risk-to-reward ratio is quite high. 

 

These are a great option for those who want to invest in gold in smaller denominations, which is impossible with physical gold. To compare the year-on-year returns on gold ETFs and invest in the top-rated gold ETFs of 2023, log on to Bajaj Markets.