Are Gold ETFs A Great Investment Tool? How They Work, Costs, Where To Buy—All You Need To Know

Net flows in Gold ETFs fell to Rs 175.29 crore in September 2023 from Rs 1,028.06 crore in the prior month, the highest net flows in over 17 months.
Are Gold ETFs A Great Investment Tool? How They Work, Costs, Where To Buy—All You Need To Know
Are Gold ETFs A Great Investment Tool? How They Work, Costs, Where To Buy—All You Need To Know

Gold Exchange Traded Funds (ETFs) are investment funds that track the price of gold and are traded on stock exchanges, much like individual stocks. Investors buy and sell shares of these funds, backed by physical gold held in vaults. This innovative investment avenue combines the liquidity of stock trading with the intrinsic value of gold, making it an attractive option for those looking to diversify their portfolios.  

How Gold ETFs Work

When you invest in a Gold ETF, you essentially own a share of the fund backed by a corresponding amount of physical gold. The fund's value mirrors the price movements of gold, offering investors a convenient way to gain exposure to the precious metal without needing storage or dealing with physical delivery.

Purity And Price And Where To Buy

Gold ETFs are backed by physical gold bars of 99.5 per cent purity. Their prices are available on the websites of the Bombay Stock Exchange (BSE) or the National Stock Exchange (NSE), allowing investors to buy or sell them through a stockbroker at any time. Unlike gold jewellery, Gold ETFs can be traded at a consistent price throughout India. Purchasing Gold ETFs on BSE/NSE involves using a broker, a demat account, and a trading account. A brokerage fee and minor fund management charges apply when buying or selling Gold ETFs.  

Difference From Physical Gold Investments

Unlike purchasing physical gold, investing in Gold ETFs eliminates the need for secure storage and insurance. With Gold ETFs, investors can buy and sell shares on the stock market at prevailing market prices, providing flexibility and liquidity that physical gold ownership may lack. Additionally, Gold ETFs offer fractional ownership, allowing investors to buy small amounts of gold at a time, making it accessible to a broader range of investors.  

Benefits Of Gold ETFs
  • Liquidity: Gold ETFs can be bought and sold during daily trading sessions, providing liquidity that physical gold transactions may lack.

  • Cost-Effective: Investing in Gold ETFs typically incurs lower costs than buying and storing physical gold. There are no expenses related to storage, insurance, or making charges.

  • Diversification: Gold has historically been considered a safe-haven asset. Including Gold ETFs in a diversified portfolio can help mitigate risks and provide a hedge against market volatility.

What To Keep In Mind When Investing In Gold ETFs

Expense Ratios: Different ETFs may have varying expense ratios. It's crucial to understand the fees associated with the fund and choose one that aligns with your investment goals.   

Tracking Error: The performance of some Gold ETFs may deviate slightly from the actual price of gold due to tracking errors. Investigate the fund's historical tracking performance before making a decision.

Market Conditions: Like any investment, the value of Gold ETFs can be influenced by market conditions. Understanding the factors affecting the price of gold is essential for informed decision-making.

Security of the Fund: Ensure the Gold ETF is backed by physical gold held in secure vaults. Transparency about the fund's gold holdings is a positive sign.

Who Should Invest In Gold ETF

Gold ETFs are perfect for investors who want to invest in gold without dealing with storage challenges or concerns about the purity of physical gold. Additionally, for those seeking tax benefits, Gold ETFs offer a viable solution. Investors can save money with no premium or charge, especially if their investment is substantial. Another advantage is purchasing as little as one unit, which equals 1 gram of gold.

How To Sell Or Redeem Gold ETF

Gold ETFs can be traded on the stock exchange through a broker using a demat account and trading account. Given that an investor is essentially putting money into an ETF backed by physical gold, Gold ETFs are more effective in capitalizing on gold price movements than as a direct access route to physical gold. When an investor sells Gold ETF units, the payment is based on gold's prevailing domestic market price. Asset Management Companies (AMCs) also allow the redemption of Gold ETF units in the form of physical gold, specifically in 'creation unit' size, provided the investor holds an equivalent of 1kg of gold in ETFs or in multiples thereof.

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