A Gold ETF is an exchange-traded fund (ETF) that aims to track the domestic physical gold price. They are passive investment instruments that are based on gold prices and invest in gold bullion.
In short, Gold ETFs are units representing physical gold which may be in paper or dematerialised form. One Gold ETF unit is equal to 1 gram of gold and is backed by physical gold of very high purity. Gold ETFs combine the flexibility of stock investment and the simplicity of gold investments.
Gold ETFs are listed and traded on the National Stock Exchange of India (NSE) and Bombay Stock Exchange Ltd. (BSE) like a stock of any company. Gold ETFs trade on the cash segment of BSE & NSE, like any other company stock, and can be bought and sold continuously at market prices.
Buying Gold ETFs means you are purchasing gold in an electronic form. You can buy and sell gold ETFs just as you would trade in stocks. 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 dematerialised account (Demat) and a broker, which makes it an extremely convenient way of electronically investing in gold.
Because of its direct gold pricing, there is a complete transparency on the holdings of a Gold ETF. Further due to its unique structure and creation mechanism, the ETFs have much lower expenses as compared to physical gold investments.
- How does a Gold ETF work?
- Who should invest in Gold ETF?
- Advantages of buying Gold ETF Units?
- How to sell / redeem Gold ETF?
- Purity & Price:
Gold ETFs are represented by 99.5% pure physical gold bars. Gold ETF prices are listed on the website of BSE/NSE and can be bought or sold anytime through a stock broker. Unlike gold jewellery, gold ETF can be bought and sold at the same price Pan-India.
- Where to buy:
Gold ETFs can be bought on BSE/NSE through the broker using a demat account and trading account. A brokerage fee and minor fund management charges are applicable when buying or selling gold ETFs
Gold ETFs are subject to market risks impacting the price of gold. Gold ETFs are subject to SEBI Mutual Funds Regulations. Regular audit of the physical gold bought by fund houses by a statutory auditor is mandatory.
Gold ETFs are ideal for investors who wish to invest in gold but do not want to invest in physical gold due to the storage hassles / doubt about purity of gold and are also looking to get tax benefits. There is no premium or making charge, so investors stand to save money if their investment is substantial. What’s more, one can purchase as low as one unit (which is 1 gram).
- Purity of the gold is guaranteed and each unit is backed by physical gold of high purity.
- Transparent and real time gold prices.
- Listed and traded on stock exchange.
- A tax efficient way to hold gold as the income earned from them is treated as long term capital gain.
- No wealth tax, no security transaction tax, no VAT and no sales tax.
- No fear of theft - Safe and secure as units held in Demat. One also saves on safe deposit locker charges.
- ETFs are accepted as collateral for loans.
- No entry and exit load.
Gold ETFs can be sold at the stock exchange through the broker using a demat account and trading account. Since one is investing in an ETF that is backed by physical gold, ETFs are best used as a tool to benefit from the price of gold rather than to get access to physical gold. So, when one liquidates Gold ETF Units, one is paid as per domestic market price of the gold. AMCs also permit redemption of Gold ETF Units in the form of physical gold in ‘Creation Unit’ size, if one holds equivalent of 1kg of gold in ETFs, or in multiples thereof.