What is Gold ETF, and How Does It Work?
An ETF, or exchange-traded fund, is a type of investment that trades on the stock exchange like individual shares. By investing in an ETF, you are not just purchasing single stocks but buying into a collection of stocks
What is a Gold ETF?
A gold ETF, or exchange-traded fund, is an investment fund targeting the price of gold. It lets the investors put their money in the yellow metal without getting a physical hold of the metal.
Key Features of Gold ETFs
- Tracks Gold Prices: Gold ETFs act actually as investment products that allow investors to profit from the change in the price of gold.
- No Physical Gold: Since investors don’t need to touch gold, it is one of the easiest ways to invest.
- Listed on Stock Exchanges: Like stocks, gold ETFs are traded through stock exchanges like the NSE or the BSE as shares of a company or mutual fund would be.
How Does a Gold ETF Work?
Gold ETFs, on the other hand, buy physical gold, and this is held in depositories of the registered sponsor. The net asset value of the fund is directly linked to the price of gold.
Working Mechanism of Gold ETFs
- Invests in Physical Gold: In the case of Gold ETFs, it is buying gold, which is then deposited in secure facilities—the vault.
- NAV Based on Gold Prices: This adjusted NAV reflects the price of gold so that investors in the fund will be in a position to exploit fluctuations in gold prices.
- Portion of Gold Holdings: The idea that is involved with a Gold ETF is that when you purchase a Gold ETF, you are getting a share in the gold inventory of the fund.
- Price Fluctuations: The price of the ETF will change with the price of gold, making it a good option for clients.
A review of the advantages of investing in Gold Exchange Traded Funds
Due to the capability of holding gold without the necessity of storage, gold ETFs are a cheap method of investing in gold.
Advantages of Gold ETFs
- Diversification: Gold ETFs present a good opportunity to have a hedging tool that inserts diversification and decreases the overall risk of the portfolio.
- Convenience: Gold ETFs traded like stocks; thus, investing in gold is not a problem for any investor interested in the product.
- Cost-effective: Unlike purchasing physical gold, which is very expensive, they are cheaper.
- Hedge Against Inflation: Specifically, gold-based ETFs may act as a hedge against inflation or market fluctuations.
Taxation of Gold ETFs
Like all other ETFs, gold ETFs are subject to capital gains taxation.
Gold Exchange Traded Funds: Tax Consequences
- Short-Term Capital Gains: In the holding period that is less than 3 years, the capital gains are regarded as short-term capital gains and are taxed according to the income tax rate.
- Long-Term Capital Gains: If you hold the ETF for more than 3 years, it becomes a long-term capital gain, and the tax on these is 20% with the benefit of indexation.
With Gold ETFs, they exposed the following risks:
You should know that gold ETFs are exposed to market risks, and this makes gold prices change from time to time, which will result in changes in the prices of gold ETFs.
Risks of Gold ETFs
- Market Risk: The prices of gold may vary, and therefore, the value of your investment is likely to lose its value.
- Liquidity Risk: This may pose a problem because you cannot easily trade your ETF units at a reasonable price.
- Counterparty Risk: Assets of the ETF are often sitting with a custodian, and there is a risk that the custodian might go down.
The benefit of investing in gold ETFs
When investing, people look for gold ETFs as a way to diversify their investment, and therefore the risk factor is low.
Benefits of Gold ETFs
- Convenience: Unlike actual gold bars, gold ETFs can be bought and sold like individual securities, just like company shares.
- Cost-effective: The main advantage that they have over other investments is that they are less expensive than purchasing physical gold.
- Diversification: Well, gold ETFs essentially add fewer risks and more opportunities to your portfolio.
- Transparency: Annually and monthly, the NAV, as well as the precise portfolio of the ETF, is published.
- Flexibility: Gold ETFs can be bought through brokers and mutual fund houses, and you can even buy them through the exchange as they are listed now.
How to Invest in Gold ETFs
However, to invest in gold ETFs, you should open a trading account with a registered broker or through an online trading company.
Investment Process
- Open a Trading Account: Apply for a trading account with a stock broker or an online stock trading company.
- Fund Your Account: You should deposit a minimum of $10 into your account before you can start trading.
- Choose a Gold ETF: Select the Gold ETF you wish to invest in and place an order to buy the ETF.
- Monitor Your Investment: Protect your investment and even sell your ETF units when you wish to do so.
Popular Gold ETFs in India
Some popular Gold ETFs in India include:
- SBI Gold ETF
- UTI Gold ETF
- Axis Gold ETF
- HDFC Gold ETF
- ICICI Prudential Gold ETF
These are not all the gold ETFs in the market, and you should always do extra research on any gold ETF before investing in it.
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