Gold EFTs combines the best of two worlds – stock trading and gold investment. Gold has been the most sought-after investment product in the world for centuries as its value has increased over time. Apart from being interwoven into cultures, gold has evolved as a good investment. It’s a great portfolio diversifier and is used to hedge against inflation and currency debasement. While holding gold in the physical form like jewellery, bars or coins is cumbersome, gold ETFs come in the dematerialised form and are closer to the market price of the metal. Expenses incurred in buying, selling or making gold jewellery is also more than gold ETFs. ETFs or Exchange-Traded funds are traded on the stock exchanges based on the value of the underlying asset. Gold ETFs have only one underlying asset — gold. So if you are looking to profit from the incremental value of gold in the future, Gold ETF investment is a good option for you.
What is Gold ETF?
Gold ETFs are mutual funds schemes that track and reflect the value of this yellow metal. It is a passive investment instrument that invests in the gold bullion. One unit of gold ETF is equal to one gram of gold. These units are derivative contracts that can be bought and sold in the stock market. Although the fund is backed by the commodity, you do not own gold in the physical form. So when you redeem gold ETFs, you receive the cash equivalent of gold and not the metal itself.
How to Invest in Gold ETFs?
You can buy and sell Gold ETFs at market prices from the cash segment of the stock exchanges like any other company stock. To trade in gold ETFs, you require a DEMAT account and a trading account. Units can be bought online with the help of a stockbroker. Once you know how to invest in a Gold ETF, you can follow the given steps:
- Open online DEMAT and trading account
- Choose the fund you wish to purchase
- Place the order for the specified units through the broker’s portal
- Once the purchase order is matched with the sell order at the stock exchange, a confirmation is sent back to you on your phone for email
- You can either buy a lump sum or systematically invest at regular intervals
- Brokerages charge a nominal amount for the transaction.
Points to Consider When Investing in Gold ETFs
Here are some points to keep in mind when investing in gold ETFs.
- Gold is an excellent asset to hedge against stock market volatility. Typically, the price of gold doesn’t move with the stock price, and hence, investors can use gold investments to safeguard against increased market volatility.
- Gold ETFs in India are monitored by SEBI and backed by real gold. Each ETF unit is equivalent to 1 gm of gold.
- If you engage in frequent trading, gold ETFs will provide you with higher liquidity than traditional gold investments.
- Given that in the past 10 years until April 2023, gold investment has earned only 7.3% returns against 12.1% generated by the Sensex, gold is better suited for short to medium-term investment.
- While choosing a gold ETF fund, take a holistic approach to evaluate all aspects, from performance to fees, before the final decision.
- Consider diversifying your portfolio. Ideally, you should allocate only 5% to 10% of your fund to gold investments.
- You should search the market for a gold ETF with a suitable fee structure. The expense ratio on gold funds can range from 0.5% to 1%.
- Monitor fund performance regularly to track the investment decisions made by your fund manager.
- Follow the gold price trend before investing and plan proper entry and exit to buy low and sell high. You can also track the best gold ETFs on the market before investing.
Benefits of investing in Gold ETFs:
Gold ETFs are comparable to bonds as a defensive asset class that can be used by investors to hedge against political and economic disruptions. With gold as its underlying asset, it is less volatile as compared to equities. Some of the other benefits of gold ETFs are as follows:
Cost-effective – There are also no entry and exit loads for trading gold ETFs making them more profitable.
Transparency – Like stocks, gold ETFs are traded based on real-time gold prices. The information on prices is publicly available.
Ease of trade – Gold ETFs can be bought and sold instantly without any hassles. This gives ETFs a higher liquidity quotient.
Longevity – Holding gold in the DEMAT form gives it protection against theft and ease of storage. You can hold gold ETFs for a longer period.
Tax benefits – Gold ETFs do not attract wealth tax or securities transaction tax. The income from Gold ETFs are treated as long term capital gains tax.
Conclusion:
As compared to physical gold, Gold ETF investment generates income through returns. They can also be used as collateral against loans. These make gold ETF a good investment option.
FAQs
What is a gold ETF?
A gold ETF is a financial instrument that tracks the price of gold on the stock market. It allows investors to gain exposure to gold assets without physically owning the metal.
How does a gold ETF work?
A gold ETF invests in physical gold or derivative contracts backed by gold. It tracks the gold price in the domestic market. It issues shares that can be traded on the stock exchange during market hours.
What are the advantages of investing in a gold ETF?
Investing in gold ETFs has the following benefits:
- Ease of trading with high liquidity
- Cost-effectiveness
- Portfolio diversification
Are gold ETFs risky investments?
Like any investment, gold ETFs carry risks. Factors like changes in the underlying security’s price, market volatility, and currency movements influence the ETFs’ price. Additionally, investors must consider the fund’s expense ratio, tracking error, and the issuing company’s reputation before investing.
How to invest in gold ETFs?
Firstly, you must open a Demat account with a reputed broker like Angel One. Once the account is active, you can start buying and selling gold ETF units by logging into the trading portal of the broker.
