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All That Glitters Is Not Gold, They Could Be Gold ETFs

Gold Exchange Traded Funds (Gold ETFs) are catching the fancy of even those who are otherwise wary of trading in digital schemes.

February 07, 2022 / 05:45 PM IST

WGIn many cultures, gold is a representation of the sun, and the sun represents new hope. In this uncertain fast-changing world, investors are once again pinning their hopes on the yellow metal. For many decades investment in gold meant buying jewellery, bars, and coins, however, with the influx of modern schemes, gold has become one of the top preferences wgcfor big and small investors.

Gold Exchange Traded Funds (Gold ETFs) are catching the fancy of even those who are otherwise wary of trading in digital schemes. They are easy to understand and trade. They allow the investors to invest in physical gold without the complication of holding physical gold. Gold ETFs also enhance the investment portfolio by building wealth and reducing the risk when other assets are experiencing volatility.  According to a report by the Association of Mutual Fund Industry (AMFI), gold ETF folios have gone up from 4.23 lakh to 32.09 lakh between December 2019 and December 2021.

Insight into Gold ETFs scheme

When you purchase Gold ETFs, you purchase gold in its digital form. Since it tracks the domestic physical gold price, it offers complete transparency. Trading in gold ETFs is like trading in stocks. One Gold ETF unit equals 1 gram of physical gold and supports the metal in its purity of 99.5% or 99.9%. Furthermore, ETFs are cost-effective in comparison with physical gold investments.

Who can invest in Gold ETFs?

Any investor, who wishes to invest in gold but without going through the inconvenience in procuring physical gold and spending on making charges, can invest in gold ETFs. As the unit price of gold ETF is almost like gold’s market price, an investor can sell his/her units on the stock exchange without any fuss.

Moreover, for investors who want to invest a smaller amount, gold ETFs are a perfect option.  Though a lot depends on the price of 1 gram of gold at the time of investment.

How to trade in Gold ETFs?

Gold ETFs are traded on the National Stock Exchange of India (NSE) and Bombay Stock Exchange Ltd. (BSE) like the stocks of any other company. Contrary to gold jewellery, gold ETFs can be traded at the same price across India. Here are the steps to follow for trading in gold ETFs: -

  • • Compare the returns offered by ETFs of different companies

  • • Contact an authorized and trustworthy broker

  • • Open a Demat and trading accounts to trade in gold ETFs – This will require your PAN, address, and identity proof

  • • Choose the quantity of ETFs you want to invest in

  • • Regularly monitor the National Stock Exchange of India (NSE) and Bombay Stock Exchange Ltd (BSE) to understand the performance of your ETFs


How to redeem Gold ETFs?

You can sell your gold ETFs at the stock exchange using Demat and a trading account. However, on redeeming Gold ETF, you don’t get physical gold but receive cash equivalent.  You can also convert your ETF into physical gold but for that minimum 1-kilogram gold unit is required as that is the standard size of one gold bar.

Taxation on gold ETFs

There are three factors that determine the tax rates for gold ETFs – the trader, the country, and the holding period. Taxes on the profit earned on the sale of gold ETF are equated with the sale of physical gold. While short-term capital gains before the three-year holding period are added to your income and taxed as per the existing slab rate, the long-term capital gains after three years of holding are subject to 20.8% cess.

Benefits & risks of investing in gold ETFs:

Benefits

  1. 1. Gold ETFs are easy to trade and safe unlike physical gold when kept in a large quantity at home.

  2. 2. They are the hedge against inflation

  3. 3. There’s a guarantee of gold’s purity

  4. 4. There’s no wealth tax, no security transaction tax, and no sales tax on gold ETFs. Furthermore, the GST charged to consumers is GST is charged to consumers is finally reimbursed.

  5. 5. ETFs are pledged as security against loans.


Risks

  1. 1. They are subject to market risks

  2. 2. They are affected by the SEBI Mutual Funds Regulations

Moneycontrol journalists were not involved in the creation of the article.
first published: Jan 31, 2022 06:20 pm