Glitter with Gold ETF

chillibreeze writer — Ramya Ramachandran

Investing in the yellow metal has always held a fancy for Indians, accounting for 23% of the world’s annual gold demand. Here’s a relatively new way to invest in gold, without having to worry about its safety.

But Why Gold as an Investment Option?

Gold possesses great potential to hedge inflation and has remained undisturbed even in times of political uncertainties, as traditional reasons dominate its demand. It has historically shown stability, unlike currencies which see fluctuations.

From an investment point of view, it is always advisable not to put all your eggs in one basket. Gold helps your portfolio during times of stock market crashes. It reduces considerable risk in portfolio as there would always be a demand for gold.

PRESENTING THE GOLD ETF

Introduced first in February 2007, a Gold Exchange Traded Fund (or GETF) is an investment option, which is similar to an open-ended mutual fund, where your money is invested in standard gold bullion of 0.995 purity.

The value of the Gold ETF is based on the price of gold. The price of one unit of Gold ETF would be equivalent to the price of 1 gram of gold. One basic difference between a mutual fund and a Gold ETF is that trading in a Gold ETF is done directly on the stock market.

Gold ETF’s are mostly traded on the National Stock Exchange. Investors require a demat account that has to be maintained with a broker, who is a member of the National stock exchange. Units are allocated and traded using the Net Asset value (NAV). The GETF unit price is tracked on the basis of the price of physical gold in the international gold market.

The main Gold ETFs currently being offered in the market are Gold BeEs, Kotak Gold, Quantum Gold, Reliance Gold, and UTI Gold ETF.

Benefits of Gold ETF

Investing in the Gold ETF possesses the following advantages:

No issues of safety and storing
Assured of purity of gold
Transparency in transactions

All Gold ETF transactions follow strict investment norms and you are allowed to invest in small denominations

Investing in Gold ETF lets you buy small units of gold at various prices to provide the benefit of cost averaging.

Tax Implications of Gold ETF

A dividend distribution tax of 14% for individuals and 22.5% for corporate, if a dividend is declared.
There would be no wealth tax or security transaction tax when a GETF is sold.
A wealth tax would be paid if physical gold is sold.

Drawbacks

Systematic Investment Plans are not available with Gold ETFs. So, if you plan to make monthly investments to average out cost of units, you would need to do it manually.
Though Gold ETFs beat inflation, factors such as entry loads and annual fund management charges, hamper returns.
The demand for gold globally is greater than its supply, leading to most of the gold being recycled. Hence, long-term returns may not be very encouraging.
Gold ETF Investment requires constant evaluation of global developments. The funds are passively managed due to which they are unable to exploit the positive trends in the market.

So should one Invest in the Gold ETF?

It’s worth investing in the Gold ETF for its positive features such as stability, less volatility, diversification of your portfolio, convenience in investing, returns that beat inflation, and tax implications. The drawback is the cost involved. It may not produce encouraging returns over the long run.

Be clear about the purpose of why you need to invest in gold. If you are looking at converting them back to physical gold later for traditional consumption, GETF would be a great option to consider. However, if long term capital appreciation is what you are looking for, GETF may not be an ideal option.

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—About our writer:

Ramya says, "I am a Certified Financial Planner with over a year of Freelance content writing experience. A full time mother and home maker, I still have enough spare time to offer my knowledge and experience in areas of money and finances. I believe life is all about smart decisions and I could offer some solutions."

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