Gold ETF: The easiest way to take exposure to the yellow metal
Updated: Nov 03, 2020 3:42 PM
When investing in gold ETFs, investors should be mindful of the management fees they ought to pay. So, ideally, it is best to opt for a gold ETF which offers the lowest management expense.
Among the several benefits of ETF or a gold fund, the major highlight is that these investments are held in Demat or paper form. So it provides safety against theft.
We Indian’s love for gold is a good document fact. However, these investments are largely in the form of jewelry stored away in a locker for most of the households. What is often left unnoticed is the cost of keeping these purchases safe. However, if gold is being purchased for investment purposes, there is a much easier alternative available in the form of a Gold ETF.
A Gold ETF is an exchange-traded fund (ETF) that aims to track the domestic physical gold price. Gold ETFs are open-ended mutual fund schemes that will invest the money collected from investors in standard gold bullion of 99.5 per cent purity. 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 dematerialized form. One Gold ETF unit is equal to 1 gram of gold and is backed by physical gold of very high purity. In effect, 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, like any other company stock, 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 redeem Gold ETF, you don’t get physical gold but receive the cash equivalent. Trading of gold ETFs takes place through a dematerialized 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 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.
However, when investing in gold ETFs, investors should be mindful of the management fees they ought to pay. So, ideally, it is best to opt for a gold ETF which offers the lowest management expense. Generally, the difference in returns of physical gold and gold ETF would be the expense ratio charged by them.
The other option an investor has is to invest in a gold fund. Usually, such funds charge anywhere from 0.62 per cent to 1.2 per cent per annum.
Physical Gold or Gold ETFs: Where To Invest Your Money?
Gold has for long been a preferred choice of investment among the masses in India. Demand for gold in India has been rising steadily for the past many years. Every year, new gold investors lookout for the best way to start investing in this precious metal. Financial advisors are often asked: Is it physical gold, gold ETF (exchange-traded funds), or gold bonds?
Investors looking to invest in gold in any form – jewelry, coins, biscuits, or Demat accounts – for any purpose have three basic options: physical gold, gold ETFs and sovereign bonds. Although there are many avenues to invest in gold through the purchase of physical gold or jewelry, the most convenient way is to invest in gold through dedicated gold mutual funds or gold ETFs or to invest through sovereign gold bonds. When it comes to resale value, investments in the form of gold jewelry take a severe hit when compared to all other options available.
According to experts, if gold is being accumulated for marriage purposes, then investments in the form of jewelry is fine. And in case of investment purposes, the best option is to invest in an ETF or a gold fund. Making such a distinction is of great importance as an investor may end up shelling making charges of around 10 per cent to 20 per cent followed by risk and cost of storing, thereby spiking in the cost of actual holding.
Among the several benefits of ETF or a gold fund, the major highlight is that these investments are held in Demat or paper form. So it provides safety against theft. Further, one can access the yellow metal for as low as Rs. 1000 a month. An investor can even opt for a SIP such that he/she can accumulate gold units over a period of time, to meet any future requirement.
by, Nitin Kabadi, Head ETF Business, ICICI Prudential AMC