Gold Exchange-Traded Funds (ETFs)
- September 12, 2021
- Posted by: OptimizeIAS Team
- Category: DPN Topics
Gold Exchange-Traded Funds (ETFs)
Subject – Economy
Context – Investors turn positive for Gold ETFs in Aug on positive global outlook.
- A gold exchange-traded fund (Gold ETF) is a passive investment fund that aims to track the price of physical gold.
- Each unit of a gold ETF represents one gram of gold as the fund invests in physical gold and investors get the units in dematerialised form.
- Since it’s an ETF, the units are listed on stock exchanges and investors can buy or sell units on the exchange platform like any equity instrument.
- Simply put, gold ETF is like buying gold in an electronic form.
- Hence, while selling a gold ETF unit, an investor will not get physical gold but the cash equivalent.
- The cost of investment in gold ETFs is generally cheaper than that of investing in gold in physical form.
- Gold ETFs back their assets by buying actual physical gold of 99.5% purity.
- This physical gold is stored in vaults with the custodian bank and valued periodically, according to the Securities and Exchange Board of India (SEBI) guidelines.
Benefits of a gold ETF –
- First, one gets to invest in gold without worrying about factors such as purity of gold, transparency of pricing, making charges, lockers and theft, among other things.
- Second, one can purchase as little as one unit — representing one gram — at a time and still have the flexibility of buying more units depending on liquidity and prevailing gold prices.
- Since it’s an ETF, it’s a liquid investment and can be sold at any time on the exchanges.
- Also, some mutual funds provide the option of giving physical gold at the time of redeeming but it is subject to certain conditions.
- It also offers many benefits in terms of tax, as income earned is treated as long term capital gain and there is no other levy such as wealth tax.
How to invest in gold ETFs
To invest in gold ETFs, you need two main things:
- Choose a gold ETF product/fund manager: Gold ETF products are offered by several banks and private financial institutions. Once you choose a product, your ETF fund manager will act as your stock broker on the NSE and buy and sell the gold instead of you. This process is just like trading in stocks and shares.
- Open a demat account: Since gold ETF is a security that is bought and sold in electronic, dematerialised form and not in physical form, you need to have a demat account to trade in them. You can open a demat account through your stock broker or the ETF fund manager you have selected.
Features of gold ETFs
- Transparency: Similar to stocks and shares, gold prices on the stock exchange are available publicly. You can know the value of your portfolio by checking the prices of gold for the day or hour.
- Easy to trade: The minimum bundle or lot that you need to purchase to start trading in ETFs is 1 unit. i.e. 1 gram of gold. You can buy and sell the units through your stock broker or ETF fund manager on a daily or even hourly basis, just like equities.
- Cost-effective: If you invest in a gold ETF listed on the stock exchange, there is no entry or exit load – a type of charge that is to be paid to buy or sell units. The brokerage charges are very low – 0.5 percent to 1 percent.
- Lower risk: Fluctuations in gold prices are generally not as high as in equities. This means that even if your returns on equities go down, gold ETFs could act as your safety net. It will prevent you from incurring large losses.
- Tax benefits: While gold ETFs attract long-term capital gains tax after one year, you do not have to pay VAT, Wealth Tax or Securities Transaction Tax on them.
Are gold ETFs popular
- According to the Association of Mutual Funds in India, there are 12 gold ETFs in the market.
- These funds had assets under management totalling more than ₹5,600 crore as on September 2019.
Risks in gold ETF investments
- Price fluctuations: Just like in any equity product, the Net Asset Value (NAV) of the units issued under a gold ETF can rise or fall according to economic fluctuations.
- Less total returns: The additional charges – brokerage, commission or fund management fees – to maintain a gold ETF could bring down its total returns in comparison with sale of physical gold.
Gold ETFs Vs Sovereign Gold Bonds
- Total returns on investment through gold ETFs is lower than actual return on gold whereas it is higher than actual return on gold in case of Sovereign Gold Bonds (due to the interest paid on the bond during holding period).
- Unlike Sovereign Gold Bonds, gold ETFs can’t be used as collateral for loan.