What are Gold ETFs - Benefits, Risks and Who Should Invest (2024)

Gold, as a commodity, has been one of the most sought-after investment vehicles around the world for centuries. In fact, India holds the position of world’s second largest consumer of the yellow metal, only next to China. If you are interested in investing in gold but find holding physical gold quite cumbersome, you can try investing in a gold ETF. Gold ETFs invest in 99.5% gold bullion, which is as good as investing in gold funds or purchasing physical gold.

Know more about gold ETFs, its benefits, risks and more so that you can make an informed investment decision.

What are Gold ETFs?

A gold ETF is an exchange-traded fund that combines the features and benefits of trading and gold investment. They are open-ended mutual funds, meaning they don’t come with a lock-in period.

Gold ETFs aim to track the price of physical gold. Fund managers of gold ETFs pool money from investors and invest in gold bullions.

Gold ETFs offer investors exposure to the global commodities market, which involves companies that deal with mining, refining and marketing gold or gold-related products. One unit of a gold ETF is equal to 1 gram of gold.

The units are listed and traded on the stock exchanges for buying and selling, similar to shares. Hence, gold ETFs are highly liquid because the units can be redeemed easily.

How do Gold ETFs Work?

Gold ETFs are supported or represented by 99.5% pure gold bars that work as security at the back end. The units of this unique mutual fund scheme are listed on National Stock Exchange (NSE) and Bombay Stock Exchange (BSE). This means that if you are buying units of a gold ETF, you are indirectly purchasing physical gold in the back end.

A gold ETF allows individuals to benefit from the price movement of gold. If an investor invests in a gold ETF and buys a share, it is considered as purchasing a certain share in the gold owned by the ETF. The investor does not directly own the gold but holds it through this intermediary.

As gold ETFs are directly related to physical gold, the price of the shares will rise and fall based on the yellow metal’s market price.

An additional brokerage fee would be levied, but investing in ETFs can be much more convenient than buying and storing physical gold.

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Also Read: Difference Between SIP And Mutual Funds: A Detailed Comparison

Top 10 Gold ETFs in India to Invest in

Here is a list of top 10 Gold ETFs in India that you might want to start investing in:

1. Invesco India Gold Exchange Traded Fund
2. UTI Gold Exchange Traded Fund
3. HDFC Gold Exchange Traded Fund
4. Nippon India ETF Gold BeES
5. Axis Gold ETF
6. SBI Gold ETF
7. Kotak Mutual Fund – Gold Exchange Traded Fund
8. ICICI Prudential Gold ETF
9. Aditya Birla Sun Life Gold ETF
10. Quantum Gold Fund

Features of Gold ETFs

Gold ETFs have several features that make them a smart investment option. Some of them have been listed below:

1. High liquidity: Gold ETFs are highly liquid as the units can be bought or sold in the stock exchange at the prevailing price during a trading session.Moreover, the transaction charges, such as government duty and brokerage fees, are much lower than physical gold.
2. Transparent investment option: Gold ETFs are available for investment on the stock market, and the unit price during a trading session is the same all across the country.There are no hidden charges in trading gold ETFs that might reduce the earnings of the investors.
3. Cost-effective alternative: Buying gold physically could involve additional charges like storage fee, bank locker fee, etc.However, that is not the case with gold ETFs. The expense ratio charged by gold ETFs is lower compared to the additional costs involved with physical gold purchase. This helps the investors earn better returns at lower costs.
4. Easy to hold for longer duration: There is no wealth tax levied on Gold ETFs in contrast to holding physical gold. Storage and safety are also not an issue. This makes it easy to hold gold ETF units for the long term.

Benefits of Gold ETFs

There are many ways in which investing in Gold ETFs can be beneficial if we compare it to purchasing physical gold. Here are some of the benefits that make it a lucrative investment option:

• Gold is one of the safest investment options as it acts as a hedge against currency fluctuation or inflation
• If you invest in a gold ETF, the purity of each unit is guaranteed to be 99.5%, which might not be the case if you buy physical gold
• You can utilise your gold ETF as collateral security while borrowing from a financial institution
• Investments made in gold ETFs add diversity to your portfolio, which could help in reducing risks and improving potential returns.

How to Invest in Gold ETFs?

You can invest in gold ETFs by two methods. One is the direct route, and the other one is the passive route:

1. Direct Route

You can buy units of gold ETFs after opening a Demat account. The purchased units will get stored in the Demat account, which you can trade on the stock exchange. The step-by-step guide for this has been discussed below:

• Step 1: Open a Demat and trading account with a stockbroker by submitting PAN details, ID and residential proof.
• Step 2: Choose the gold ETF that you wish to invest in.
• Step 3: Place the order for the number of units you wish to purchase. You can either opt for the SIP or lump sum investment mode.

Once the purchase order and sell order match at the stock exchange, you will get a confirmation on your phone and email. You will have to bear a nominal charge for brokerage during the transaction process.

2. Passive Route

If you do not want to invest in gold ETFs directly, you can invest in gold mutual funds that invest in gold ETFs. These are known as fund of funds that have other funds as the underlying securities. FoFs are operated and handled by experienced fund managers who analyse the market conditions of various gold funds before going ahead with asset allocation.

Who Should Invest in a Gold ETF?

Gold ETFs are an ideal investment option for those who want to invest in gold but do not wish to bear the hassles of purchasing and storing physical gold.

Investing in a gold ETF means you do not have to worry about the purity of gold. The absence of making charges that are usually associated with physical gold also helps investors to save money.

Gold ETFs are also suitable for investors looking to diversify their portfolios with exposure to the commodities market.

As the price of gold is not directly related to other types of investment options, its prices may increase when the price of other assets decreases.

Why Should You Invest in Gold ETFs?

If you wish to enjoy taxation benefits against your investments, you can consider investing in gold ETFs. They are considered non-equity assets, and hence, they are taxed as debt funds. The taxed amount is way lower than taxation on physical gold.

Also, gold investments act as a hedge against inflation. Thus, investors who wish to diversify their portfolio by investing in a cost-effective asset can consider going for gold ETFs.

Risks involved in Gold ETFs

Gold ETFs have shortcomings that you need to know before investing in them. Here are some of the risks associated with gold ETFs:

• Price fluctuation: The price of gold is closely related to inflation, various geopolitical reasons and global market fluctuations. The Net Asset Value of the units of gold ETFs can witness sudden rise and fall as per the economic situation.
• Variable return on investment: The additional charges associated with a gold fund, like fund management costs, brokerage or commission, can bring down the return on investment.
• Limited time for trading: Trading in units of gold ETFs is possible only for five working days between 9:15 am to 3:30 pm. In contrast, investments in physical gold can be made throughout the year.

How to Sell/Redeem units of Gold ETFs?

Just like the shares of companies, the units of gold ETFs can be bought or redeemed via a broker platform. All you require is a Demat account to store the purchased units and a trading account to trade the units on the stock exchanges.

Investments are made in ETFs to profit from the price of gold rather than gaining access to real gold. You will get the payment at the domestic gold market price if you liquidate gold ETF units.

For example, if you own the equivalent of 1 kg of gold in an ETF format, the AMC will allow redemption of gold ETF units in physical gold format on the ‘Creation Unit’ scale.

In case of redemption, you should contact the fund house and submit a redemption request. You must also ask your depository participant (DP) to move the required number of units to the fund house’s DP account.

Moreover, some AMCs might ask you to provide a repurchase request number (RRN) through their DP to relinquish units.

Also Read: 10 Best Mutual Funds With Lowest Expense Ratio

Taxation of Gold ETFs

If you purchase units of gold ETFs and hold them for less than 36 months, the profit you earn from it is considered short-term capital gains (STCG). These gains are added to the investor’s income and are taxed as per the existing slab rate.

However, the returns are considered long-term capital gains (LTCG) if you hold the units for 36 months or more. The rate of taxation on LTCG is 20% plus indexation benefits.

Final Word

Investment in gold has always been considered a safer investment option in India. Gold ETFs provide much-needed diversification in your investment portfolio. Additionally, they are much less cumbersome to deal with than holding physical gold. However, similar to other types of investments, you must be cautious while investing in gold ETFs. Impulsive buying and selling can incur losses that might affect the return potential.

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This article has been prepared on the basis of internal data, publicly available information and other sources believed to be reliable. The information contained in this article is for general purposes only and not a complete disclosure of every material fact. It should not be construed as investment advice to any party. The article does not warrant the completeness or accuracy of the information and disclaims all liabilities, losses and damages arising out of the use of this information. Readers shall be fully liable/responsible for any decision taken on the basis of this article.