What is Gold ETFs ?
You may know about shares, but what is Gold ETF? Gold Exchange-Traded Fund (ETF) is a type of investment fund traded on stock exchanges. It tracks the price of physical gold and allows investors to buy the precious metal without physical control. Each unit of a Gold ETF represents a certain amount of gold, typically one gram or a fraction. These ETFs are backed by physical gold of high purity, ensuring transparency and safety.
Table of Contents
Why Invest in Gold ETFs?
- Diversification: Gold Exchange-Traded Fund (ETF) will be a great diversification to put your investment into the market, this will help you diversify once you don’t know which way the market will go.
- Liquidity: Gold Exchange-Traded Fund (ETF) are unlike physical gold in that they can quickly be bought or sold on stock exchanges during trading hours.
- No Storage Hassles: Gold Exchange-Traded Fund (ETF) are not held and because they are held electronically they eliminate the need for storage or security concerns.
- Cost-Effective: Unlike jewelry, there are no making charges and the expense ratio on Gold Exchange-Traded Fund (ETF) tends to be low.
- Tax Benefits: After three years capital gains tax is long term and indexation benefits may reduce the tax liability.
How Gold ETF Works
Gold ETFs are simply gold ownership without investors needing to store or deal with the gold themselves. Here’s a detailed explanation of how they function:
- Fund House Operations: Gold Exchange-Traded Fund (ETF) are the fund houses that manage them buy and store physical amount of gold which is equal to the money invested by ETF buyers. Gold is kept in secure vaults to high purity standards (usually 99.5 or higher percent gold).
- ETF Units: A Gold Exchange-Traded Fund (ETF) is broken down into each unit which is usually one gram or fractional thereof. Just like shares these units are listed and traded on stock exchanges, such as NSE or BSE.
- Trading Mechanism: The Gold ETF units are traded by Investors in their trading accounts during trading hours. Price of the ETF depends on what is the price of gold in the market and what is the demand/supply dynamics of the ETF itself.
- NAV (Net Asset Value): The market price of gold for the Gold ETF is adjusted by fund expenses, captured in the NAV. Slight deviations between the ETF’s NAV and gold prices may exist because of tracking errors.
- Settlement: A demat account saves investment by withdrawing from physical delivery and transactions are settled electronically.
How to invest in Gold ETF
- Open a Demat and Trading Account: To hold units of Gold ETF electronically, you need a Demat account. These ETFs can be bought and sold by these ETFs through a trading account on NSE, BSE etc. To open a Demat account, you can use online platforms like Groww, HDFC Bank, or Zerodha.
- Choose the Right Gold ETF: Search for available Gold Exchange-Traded Fund (ETF) in the market. Factors such as expense ratio, tracking error, liquidity, historical performance etc. need to check.
- Check Market Trends: Watch gold prices and economic signals to find favourable investment opportunities. The highly maximized returns are realized if the investment occurred at a price drop or under an economic uncertainty situation.
- Place Your Order: If you have your trading account login, look for the Gold ETF that you are interested in by its symbol. Buy order a quantity and set a price limit (or for immediate execution use a market order).
- Track Your Investment: Watch the performance of the Gold ETF units on a regular basis. Think of rebalancing your portfolio regularly to stay ready if the gold prices are in flux.
- Sell When Needed: You can sell your Gold ETF Units, liquidity or profit booking, from your trading account.
Gold ETF Returns And Comparison: Gold ETFs vs. Nifty and Sensex
Gold ETFs have shown impressive returns in recent years. Over the past year, most Gold ETFs in India have delivered returns between 21-22%. Some of the top-performing Gold Exchange-Traded Fund (ETF) include Kotak Gold ETF, LIC Gold ETF, HDFC Gold ETF, and Mirae Asset Gold ETF.
These returns reflect the strong performance of gold as an asset class, driven by global uncertainties, inflation, and geopolitical tensions. Gold Exchange-Traded Fund (ETF) offer a convenient and cost-effective way to invest in gold without the hassles of storing physical gold2.
Comparison: Gold ETFs vs. Nifty and Sensex (Last 6 Years)
| Year | Gold ETF Return (%) | Nifty 50 Return (%) | Sensex Return (%) |
| 2019 | 23.2 | 12 | 14.4 |
| 2020 | 27 | 14.9 | 15.8 |
| 2021 | -2.6 | 24.1 | 22 |
| 2022 | 11.3 | 4.3 | 4.4 |
| 2023 | 15 | 20 | 18 |
| 2024 | 10 | 18 | 17 |
Insights from the Comparison:
- Volatility: Gold ETFs tend to be less volatile compared to equity markets, providing a stable investment option during uncertain times.
- Performance During Crisis: Gold ETFs performed exceptionally well during market downturns, such as in 2020 during the COVID-19 pandemic.
- Long-Term Growth: While equities (Nifty and Sensex) outperformed gold in the long term, gold has proved to be an excellent hedge against inflation and economic uncertainty.
Gold ETFs vs Other Gold Investment Options
| Investment Option | Liquidity | Cost Efficiency | Storage Required | Tax Benefits |
| Gold ETFs | High | High | No | Yes |
| Physical Gold | Low | Low | Yes | No |
| Sovereign Gold Bonds | Medium | High | No | Yes |
| Gold Futures | High | High | No | No |
Gold ETF Taxation in India
Short-Term Capital Gains (STCG):
- If you sell your Gold Exchange-Traded Fund (ETF) within 24 months of purchase, the gains are classified as short-term capital gains.
- These gains are taxed at your applicable income tax slab rate. For instance, if you’re in the 30% tax bracket, your gains will be taxed at 30%.
Long-Term Capital Gains (LTCG):
- If you hold your Gold Exchange-Traded Fund (ETF) for more than 24 months, the gains are considered long-term capital gains.
- These gains are taxed at a flat rate of 12.5% without the benefit of indexation. Indexation adjusts the purchase price for inflation, potentially reducing the taxable gains, but this benefit is not applicable for Gold Exchange-Traded Fund (ETF).
These changes were introduced in the Union Budget 2024 to simplify the tax structure and encourage investment in gold-related assets. Always consider consulting a tax advisor to ensure you are compliant and understand the nuances of your specific situation.
Best Gold ETF in India
| Gold ETF | 5-Year CAGR | Expense Ratio |
|---|---|---|
| IDBI Gold ETF | 13.87% | 0.35% |
| Kotak Gold ETF | 13.84% | 0.38% |
| Aditya BSL Gold ETF | 13.76% | 0.40% |
| SBI-ETF Gold | 13.76% | 0.30% |
| Invesco India Gold ETF | 13.70% | 0.33% |
| ICICI Prudential Gold ETF | 13.63% | 0.36% |
| HDFC Gold ETF | 13.51% | 0.37% |
| Nippon India ETF Gold BeES | 13.43% | 0.29% |
| Quantum Gold Fund | 13.40% | 0.34% |
| UTI Gold ETF | 13.37% | 0.32% |
Gold ETF vs Gold Mutual Fund
| Aspect | Gold ETFs | Gold Mutual Funds |
| Management | Passively managed, tracks gold prices | Actively managed by a fund manager |
| Investment Objective | To replicate the performance of gold | To invest in gold ETFs or gold-related assets |
| Liquidity | High, traded on stock exchanges | High, can be redeemed anytime |
| Costs | Lower expense ratios, no entry/exit loads | Higher expense ratios, may have entry/exit loads |
| Taxation | Subject to STCG and LTCG taxes | Subject to STCG and LTCG taxes |
| Investment Minimum | Requires Demat account, no minimum | Can start with small amounts (e.g., Rs 500) |
| Suitability | Suitable for investors seeking direct exposure | Suitable for investors preferring managed funds |
Gold ETF vs Physical Gold
| Aspect | Gold ETFs | Physical Gold |
| Ownership | Electronic form of gold | Physical possession (coins, bars, jewelry) |
| Storage | No storage concerns | Requires secure storage |
| Liquidity | High, traded on stock exchanges | Moderate, can sell to jewelers or private transactions |
| Costs | Lower expense ratios, no making charges | Includes making charges, storage, and insurance costs |
| Purity | No purity concerns, tracks gold prices | Purity can vary, requires certification |
| Taxation | Subject to STCG and LTCG taxes | Subject to wealth tax, STCG, and LTCG taxes |
| Investment Minimum | Can start with small amounts, needs Demat account | Varies, depends on weight and purity |
| Suitability | Ideal for hassle-free investment | Preferred by those who value tangible assets |
Conclusion
Without a doubt, Gold Exchange-Traded Fund (ETF) as an addition to an investment portfolio are stellar because they are highly liquid, very cost-effective, and remove the hassle of gold storage. Moreover, Gold Exchange-Traded Fund (ETF) are a halal investment for Muslim investors since these represent ownership of physical gold as an asset, and due to avoidance of interest (interest is forbidden under Islamic principles).
FAQs – Frequently Asked Questions
What is Gold ETF?
A Gold Exchange Traded Fund (ETF) is an investment fund that trades on stock exchanges, similar to stocks. It aims to track the price of gold by investing in gold bullion. Investors can buy and sell Gold Exchange-Traded Fund (ETF) just like they would trade shares of a company.
How do I invest in Gold ETFs?
To invest in Gold Exchange-Traded Fund (ETF), you need a Demat account and a trading account with a broker. You can then purchase ETFs through stock exchanges, just like you would buy stocks. The transactions are completed electronically, and the units of Gold ETFs are credited to your Demat account.
What are the benefits of investing in Gold ETFs?
Gold Exchange-Traded Fund (ETF) offer several benefits, including high liquidity, as they can be easily traded on stock exchanges. They ensure investment in high-quality gold, alleviating purity concerns, and eliminate the need for physical storage and security. Additionally, they are cost-effective, with lower expense ratios compared to physical gold investments, making them a convenient choice for investors.
Are Gold ETFs subject to taxation in India?
Yes, ETFs are subject to capital gains tax. Short-term capital gains (if held for less than 24 months) are taxed at your income tax slab rate. Long-term capital gains (if held for more than 24 months) are taxed at 12.5% without indexation benefits.
What are the risks associated with Gold ETFs?
While ETFs offer many advantages, they also come with certain risks. Market risk means their value can fluctuate based on gold prices. Liquidity risk indicates that selling large quantities quickly might affect prices. Additionally, tracking errors can occur, where the ETF’s performance slightly differs from the actual price of gold due to fees and expenses.
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