Rather than investing in physical gold such as jewellery, gold coins, bars where the charges eat into the returns, gold ETF mirrors the price of physical gold and has low costs.
Gold Price Today: Gold prices in the international markets and even in India are on the rise. The spot price of gold today on the MCX platform is nearly Rs 48730 per 10 gram and is expected to go beyond the Rs 50,000 mark. Those who wish to maximize returns from the potential of gold as an asset class, Gold exchange-traded funds (ETF) could be a better option. Rather than investing in physical gold such as jewellery, gold coins, bars where the charges eat into the returns, gold ETF mirrors the price of physical gold and has low costs. “The advantage of securitizing physical gold into a paper asset is that it takes care of issues associated with owning physical gold, including Government restrictions, assurance of purity, lower transaction costs in trading with higher liquidity, lower wastage, divisibility into smaller units even up to 1 gm and so on,” says Siddharth Panjwani, Chief Strategy Officer, Pickright Technologies.
So, what are gold ETFs and how to invest in them? Gold ETF is almost similar to mutual fund schemes where the underlying asset is the gold unlike stocks in equity mutual funds. Gold ETFs are passive investment instruments that are linked to gold prices and invest in gold bullion. They are investment products that combine the flexibility of stock investment and the simplicity of gold investments. The best part is that the gold ETF represents paper-gold as the investment is held in your Demat account.
Where to invest
Gold ETFs are available on stock exchanges such as NSE or BSE and are traded during the time when the exchange is open. ETFs trade on the cash market of the Stock Exchange, like any other company stock, and can be bought and sold continuously at market prices.
Which scheme to invest in
There are several Gold ETFs being traded in the exchange and each of them will have its own market price. The liquidity, however, is low in them and selling huge quantities of units at the right price may be difficult at times.
Some of the Gold ETFs available on NSE are Nippon India ETF Gold BeES, Axis Gold ETF, HDFC Gold Exchange Traded Fund, ICICI Prudential Gold Exchange Traded Fund, Kotak Gold Exchange-Traded Fund, Quantum Gold Fund, SBI Gold Exchange Traded Scheme and UTI GOLD Exchange Traded Fund.
How to decide
Most ETFs charge lower annual expenses than index mutual funds. However, as with stocks, one must pay a brokerage to buy and sell ETF units, which can be a significant drawback for those who trade frequently or invest regular sums of money. “With more than 15 Gold ETFs listed in India, the best way to decide which ETF to invest in is to look at A) expense ratios – lower the expense ratio, the better and B) Tracking error – as similar a return to the underlying Gold asset as possible,” says Panjwani.
Differentiation in price
Some gold ETFs are available with a face value of Rs 1 while others could have Rs100 and hence their trading price could differ. “Gold ETFs can have different face values depending on what the face value represents at the time of the creation of the ETF. One ETF could have 1 unit representing 1 gm of Gold, another could have 1 unit representing 10 gms of gold and so on. The only difference is the granularity of the unit. The return on the ETF is supposed to reflect the return in physical gold. So investors wanting to transact in lower weightage of gold can opt for the former, while those wishing to transact in higher weightages of gold can choose the latter,” says Panjwani.
Source: NSE website (As on June 30, 2020)
As an investor in gold
Gold price tends to move up during Geopolitical tensions and in an environment when equities and interest rate fall. The investors also find solace in gold during a high inflationary period and dampening economic activities. Retail investors should stay away from speculating about gold prices rather invest about 10 per cent of their portfolio in gold for the long term. Sovereign gold bonds and gold mutual fund schemes also provide an alternative to investing in gold in paper-form.