Gold ETF: All you need to know

a few months ago

Gold ETF: What is it?

Gold ETF Complete guide

 

The Gold ETF is an exchange-traded fund.  Just like any other fund, it can be bought and sold only on stock exchanges.

This saves you the trouble of keeping physical gold. The underlying asset of  Gold ETF is physical gold.

Thus, just like mutual funds where the value of one’s investment is a cumulative value of underlying securities (equity or debt), in gold ETF, it is Gold.

Gold as an asset is mostly used for diversification and as low risk investment protection. But the problem is costs that comes when you buy gold in physical form.

When you purchase gold in physical form, you need to pay for many charges like making, handling & purity. Thus leads to higher price as compared to base price of Gold.

If you buy Gold coin, then it is only realise later that you can’t sell these coins back to the bank. Yup, you read that right. Banks are interested in selling you Gold coins because they sell well in turbulent times.

Benefits of Gold ETF

Here is the quick list of benefits of investing in Gold ETFs as compared to investing in physical gold:

  • No making charges & jeweller’s margin, saving huge initial costs.
  • No storage charges and physical management, saving holding charges
  • You pay according to standard purity. No need to invest extra for certifications and other charges.
  • Easy to hold in demat form.
  • Prices are similar to Gold prices as commodity

Thus, if you plan to invest in Gold as an asset to diversify, Gold ETF is clearly the better choice. You just buy and hold them in your demat account.

If you have patience, then I would rather suggest you to invest in Sovereign Gold Bond Scheme. This is clearly better investment than any other form of Gold. The catch is that it open for investments only for certain period in a year. Click here to know more details.

 

How to buy Gold ETFs?

  1. If you don’t have an account with any stock broker yet, then open one today at Zerodha or Upstox.
  2. Choose the Gold ETF you want to invest into. Here is the list of the best performing ETFs (updated August 2019).
  3. You will see the price of the ETF in unit format. You can buy as per funds that you want to invest in Gold. It is advised not to invest in one go, rather to buy partially.
  4. You will get the bought units transferred to your demat account on T+2 (two days after the buying date).

Charges associated with ETFs

Every fund has certain charges, which are deducted by the fund house. As there is no active management with ETF, there charges are less, but still there charges.

In case of Gold ETF, the charges are:

  • Expense Ratio: This is the fund management fee. It is minimum for ETF. Currently it is 1%.
  • Brokerage: If you are using Zerodha or Upstox as your broker, these charges are very less ( in Zerodha equity investing is free).
  • Tracking Error: This is the difference due to operations of the fund. An ETF gets fund from investors and then it proceeds to buy the equivalent Gold units. Also it has to keep certain amount of cash and debt instruments for regulatory and liquidity compliance. This leads to tracking error between prices of the Gold and the ETF performance.

Best Gold ETF in Indian market

Name YTD Return % Total Expense Ratio %
SBI ETF Gold  32.34 0.52
Invesco India Gold ETF 11.30 0.45
Aditya Birla Sun Life Gold ETF 10.33 1.03
ICICI Prudential Gold ETF 10.06 0.70

YTD: Returns as on year-to-date
TER: Total expense ratio
Source: Morningstar.in 

Why ETF prices are different?

As you can see from the table above, one of the factor is difference in the expense ratio. The other factor is composition of Gold, Debt instruments & cash of each fund.

These factors as well as the active purchasing and selling going on the market leads to difference in units. 

In most scenarios though, the difference is not much. And if you can actually use it to buy the units at good price. 

Can you convert ETF units unto physical Gold?

Except for couple of Fund houses, you can not convert your Gold ETF units into physical Gold. More suitable instrument for that will be E-Gold, which is buying Gold in electronic form. 

E-Gold as investment is offered by the National Spot Exchange Limited (NSEL). For details, please follow this link. 

Taxation

Gold ETFs are considered as financial assets and are taxed accordingly. 

If your holding period is less than 12 months, then for tax purposes, it is considered short-term. Which means when you sell it, it is added to your annual income and taxed as per applicable rates. 

If you hold your units for more than 12 months, then you get the benefit of Long term investments. Which means, your profit is indexed and then taxed at the rate of 20%. 

Conclusion

Though, Gold seems like a good investment when markets are down, don’t put more than 10% of your investments into the Gold. 

Gold in itself is a precious metal with no inherent value. Thus, the price it has is all about demand and supply. So, when the demand falls, the prices can stay constant for very long time or even fall. 

~Happy investing. 

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