We, Indians love gold. As per the World Gold Council, India was the world’s second largest gold consumer in the year 2023 with a consumption of 562.3 tonnes. Since historic times, gold has had a huge demand in our country. In fact, a few decades ago, we always thought of gold first, when we were looking for products to invest money. Over the years, financial products have evolved and people can now invest in gold without actually buying physical gold. In today’s post we will understand everything about Gold Exchange Traded Funds (ETF’s) and why these are a good investment option.
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What is Gold ETF?
A gold ETF is an exchange traded fund (ETF) that tracks domestic physical gold price. These are passively managed mutual funds which invest in gold bullion.
Gold ETF’s are units which represent physical gold in an electronic format. One unit of gold ETF is equal to 1 gram of physical gold of a very high purity. Gold ETFs are listed and traded on the National Stock Exchange of India (NSE) and Bombay Stock Exchange Ltd. (BSE). The units can be bought and sold at market prices like any stock.
When you actually redeem Gold ETF, you don’t get physical gold, but receive the cash equivalent. Trading of gold ETFs takes place through a demat account and a broker. It is a very convenient way of investing in gold. There is complete transparency on the holdings of a Gold ETF as these are listed and traded. Also buying Gold ETF is more affordable than buying physical gold because you buy ETF units.
How does a Gold ETF work?
Gold ETF’s are represented by 99.5% pure physical gold bars. The ETF price is directly linked to the gold price. So if gold price increases by 5% the ETF value will also increase by around 5%. Similarly, if gold price reduces by 3%, the ETF value will also decrease around 3%.
What are the benefits of buying Gold ETF units?
- Guaranteed purity of gold as units are backed by 99.5% pure physical gold bars.
- Listed and traded on stock exchanges.
- Transparent and real time gold prices.
- No entry and exit load on Gold ETF’s
- ETF’s are accepted as collaterals for loans.
- No added stress of storing gold in safe custody as the ETF’s are in electronic format.
How to redeem Gold ETF?
Gold ETFs can be sold at the stock exchange through your demat account and trading account that you hold with the broker. When one sells/redeems Gold ETF Units, one is paid as per domestic market price of the gold.
What is the taxation on Gold ETF redemption?
Where Gold ETF are redeemed within 36 months of investment, these will be taxed at tax rates applicable to the individual. When the redemption is done after 36 months of investment, the amount will be treated as a long term capital gain and taxed accordingly.
Who should invest in Gold ETF?
Gold ETFs are ideal for investors who want to invest in gold but do not want to buy physical gold. They save money on gold storage, locker rents, making charges etc by investing in Gold ETF’s. Moreover, they can purchase as low as one unit of gold (which is 1 gram).
The beauty of Gold ETF is, that you can build a reserve to buy physical gold while staying invested in Gold ETF’s. The reserve you create (in the form of Gold ETF units) will always be more or less equal to the market price of physical gold whenever you decide to buy it.
