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What Is Gold ETF? How To Invest In Gold ETF?

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Amazing Facts about Gold ETF

Before addressing Gold Etf, let’s understand why people buy gold. Gold is an emotional asset. The selling of an emotional asset is not easy for many people. 

When other investments do not give good returns, people start investing in gold. Gold investment rises during recessions. People buy the goal to hedge themselves from the unforeseen financial crisis.

Gold in physical form is the most adored commodity, or shall we say metal, worldwide. People hoard gold like crazy, reason better known to them. 

In modern-day technology, if you want to hoard gold, no need to keep it in physical form; you can keep it in paper form.

However keeping in paper form, you will not be the owner of physical gold but you will own gold for sure.

There are many instruments in the stock market where you can invest. This is one of the popular instruments in gold ETF investments. Gold Etf will enable you to do that, which is your own gold in the paper. 

Before we dive into the ocean of Gold ETF, let us understand ETF first. This is essential because gold ETF will let you reap the advantages of gold ETF return along with other benefits of Gold ETF.

ETF is an Exchange-traded fund traded on Exchange, similar to a mutual fund but ETF follows an index on the stock exchange. So, gold ETF will also trade on the exchange like a normal stock.

Gold ETF Review

Exchange-Traded Fund (ETF)

ETF is the abbreviation of the exchange-traded funds. ETFs are primarily Index Funds that are listed and traded like stocks in an exchange. 

Exchange-Traded Fund (ETF) is a type of security that constitutes a collection of securities such as stocks, commodities, bonds, and works of arbitrage mechanism.

Benefits of ETF vis-à-vis Shares

There are many advantages associated with the ETF. ETF offers diversification. ETF investments offer exposure to specific sectors, in this case, the metal commodity sector. 

Diversification

ETF generally is a combination of specific stocks, commodities and other relevant products, thus helping an investor diversify his/her investments. 

Liquidity

ETF offers Liquidity as in ETFs are traded directly over the stock exchanges,

Lower Expense

The ETFs call for lower expenses as compared to Mutual Funds due to several reasons. Direct and indirect costs (transaction costs, slippage, bid-ask spread, liquidity impact, opportunity costs, and market trends) do not exist in the simulated environment.

Important facts about an ETF

  • It is like an index fund but its units are bought and sold on a stock exchange
  • It also copies an index in terms of its holdings and hence performance of ETF funds is similar to that of an index fund
  • It is less risky, low cost due to low fund management charges
  • Involve broker charges and you need a Demat account to transact

So, now it is time to get to business by hooking on to our main point of discussion, namely, Gold ETF fund.

What is Gold ETF?

There is a difference between the Gold ETF and Gold Fund. Indians love physical assets in the form of gold. You can invest in gold jewelry, gold ornaments, or gold bullions. 

There are many options. When you try to sell gold jewelry or ornaments back, you do not get all the money that you spent to buy the gold. 

Gold bullions or Gold biscuits call for a huge amount of money to buy those. So we often cannot invest that money.

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Gold ETF contains units that represent physical gold in paper form. Gold ETF starts from as low as 1mg. 

Suppose, for example, 1 kg of gold costs 30 lakhs. We create a 1 lakh unit and let us assume that each unit is of Rs.30, which tantamount to Rs.300000. 

So if someone wants to buy small units, he can buy 1 unit @Rs. 30. So, we can trade gold ETF the same way we trade stocks on the exchange. You can invest a minimum of 1 gram and buy 1g of gold.

How to buy Gold ETF?

You can go to a bank and ask them to buy Gold ETF for you via the fund manager of the bank.

Gold is a fund instrument traded on an exchange like a stock. On one hand, you are there as an investor. Another end, there will be a fund management company. 

You can go and pay to a fund manager and fund Management Company will add units in your portfolio. Fund Management Company for this will charge expenses, so the return will be after deducting expenses of the fund management company.

If you have a Demat account, you can buy gold ETF using your Demat and trading account directly from the stock exchange, the same way you follow to buy any stock in the stock market.

Advantages of Gold ETF

Small Investment

You can invest a small amount and continue to invest in a smaller amount and start accumulating gold in paper form.

If you have less money, not sufficient to buy physical gold from the open market, then you can invest that money to buy gold ETF.

Easy conversion

If you want that gold physically, you can sell your share of gold ETF and buy physical gold with that money. 

Once you accumulate enough units to buy physical gold, you can then liquidate your gold ETF and use the money to buy physical gold.

No Wealth Tax

Gold ETF does not create any liability of wealth Tax. If you hold physical gold, you may have to pay long term capital gain tax which is free for Gold ETF.

No fear of losing gold

In Gold ETF, you do not have any fear of losing gold by theft, no storage required to like what you need in storing physical gold.

Easy Liquidity

It is listed on NSE exchange where enough buyers are available. This offers the liquidity, as you can sell or by gold ETF units at any time of the trading hours.

Minimum Investment

It is available at a minimum of 1g of gold. If you do not have enough money to buy physical gold but wish to buy in the future, then you can continue to buy units of gold ETF. 

Flexibility

Flexibility is the key here. You can buy or sell ranging from 1 gram to any quantity of gold ETF units.

Transparency

You can get here the standard wholesale price of gold. So buying gold ETF units is much cheaper than buying physical gold units. 

Gold ETF is transparent as the ETF price prevailing currently is open for everyone to see in the stock exchange. 

Price is determined on NSE exchange depending on the demand and supply of gold ETF units.

No Depreciation

There is no depreciation cost involved in gold ETF, as it is for physical gold. 

In physical gold you do not get the full price as there will be depreciation of gold jewelry, it will have making charges, storage charges, maintenance charges, apart from fluctuations of price in the market. These are not applicable to the gold ETF.

Hedge against Loss or Inflation

Gold ETF hedges you from loss unlike physical gold depreciating value. Gold ETF hedges you from inflation, price fluctuation, market ups and downs, economic depression, etc.

Exposure to Gold

If an investor is a process of building a balanced portfolio, and he wants gold exposure in his portfolio, for you to get gold exposure are to invest in the gold ETF.

Descent Return

You can buy gold jewelry is not the ideal way of investing in gold. Gold ETF gives you a proper return based on the current value.

Easy Buying and selling

Whereas, when you own physical gold, you are unsure what price will you get when you go to a jewelry shop to sell your gold. 

Gold Jewellery will give you a different estimate of the price of your gold, some will show higher deduction, some will show other charges involved in the selling process. 

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No Hidden charges

Many jewelers will often have hidden charges as well which you may not be aware of while selling. Gold ETF is transparent and does not involve any sort of hidden charges.

Simplicity

So selling physical gold is a tedious and risky process. Gold ETF is simple to buy or sell without much headache.

Best Gold ETF in India

  • SBI Gold ETF
  • Kotak Gold ETF
  • HDFC Gold ETF
  • Reliance ETF Gold bees
  • Axis Gold ETF
  • UTI Gold ETF
  • Birla Sun life Gold ETF

Note: If Asset under management is less for the above companies then the expenses for the above funds will be high. So, check AUM before buying the gold ETF from the above fund management companies.

Also, check the Gold ETF NAV. It is per share or per unit value at which you buy or sell units of gold ETF.

Why do you invest in Gold ETF?

Firstly, do you have enough gold to sleep on it? Okay, but can you sleep as you will be worried about losing gold, theft, stealing, robbers. So even if have enough gold to sleep, you will not be able to sleep. Gold ETF helps you get rid of this problem.

Secondly, if you take your gold to a jeweler to sell, you will have to first prove that the gold you are carrying is real. You have to show the purchase cash memo and the hallmark. If you do not have or lost those, the jeweler may say it is not real gold. In gold ETF you will not face this problem.

Thirdly, the Gold that you own, the value is depreciating due to various reasons. So while selling you will never get the money that you spent to buy that amount of gold. Gold ETF value does not depreciate, but it may go up and down based on the demand-supply pull and push.

So, the perfect solution to all the above problems is the gold ETF. You can gold online in the form of gold ETF. 

Drawbacks of ETF/Gold ETF

Every investor, budding or experienced, would in inquisitive to know what gold ETF is and how they work.

Many types of financial vehicles are vying for your investment money. One relative newcomer in the world of investment is Exchange Traded Fund, popularly called ETF. 

ETFs are tailored to give exposure to one particular index sector, or commodity, without the difficulties inherent in investing directly in the tracked asset(s).

However, ETF has its own limitations. Let’s examine these drawbacks, using Gold ETF as an example.

How does Gold ETF work?

Gold ETFs are constructed to track the price of gold either through investing in gold futures and derivatives or by holding physical gold in a vault.

Gold Etf shares are financial instruments issued by a fund. They are not a claim to physical gold or gold futures. No ETF directly buys or sells its own shares on the stock exchange. 

Instead, it designates market makers as “Authorised Participants”. Only these Aps can create or redeem ETF shares.

Gold ETF can only be made or redeemed in “Creation Units” or “Baskets”. These baskets can hold 50000 to 100000 shares depending on the ETF. 

These APs can profit from being market makers, both when prices rise or fall.

However, this ability to redeem gold ETF shares for physical gold is something that is denied to regular investors, even if they own a full basket of shares. 

Risks of Investing in Gold ETF

Physical gold is the world’s only financial asset that is not simultaneously someone else’s liability. 

That is physical gold has no counterparty risk. 

In contrast, gold ETFs depend on a web of counterparty risk. Gold ETF does not actually hold the gold they own. Instead, they depend on a custodian to store and protect their gold. 

This master custodian depends on sub-custodians to move gold bars between trust’s account an Apps account. During the financial crisis, any god moving from custodian account could be frozen if custodian’s bank fails. 

invest Gold etf using zerodha

Gold ETF Conclusion

Gold Etf may lose charm. Gold is a store of value and not an investment. It just sits in your locker. You have to spend further cash to preserve and protect it to ensure its safety. 

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Gold ETF, unlike any other assets like Equity, does not provide an earnings stream. For example, interest comes from a fixed deposit, rent coming from real estate, gold does not generate something similar to this. 

To many, gold is a junk occupying space either in your house, bank or in your portfolio. Gold is stored or invested in entirely depends on fear. As a store of value, gold is a very old asset class. 

Gold can be taken as a short term arrangement, and not long term. The different forms you can hold gold today. Physical gold is easy to buy but hard to sell. Gold Etf has a lower return. 

The gold fund is like mutual fund, again lesser return but higher than Gold ETF. The new instrument is a sovereign gold bond that gives return available on gold. 

Highest security as issued by the government of India. You get 4% over and above the return. This is the best way to hold gold for the longer term. The sovereign gold fund does not have the expense, Gold Etf has.

Gold ETF Stock Trading FAQs

Q1. What is Gold ETF?

Gold ETF contains units that represent physical gold in paper form. Suppose, for example, 1 kg of gold costs 30 lakhs. Let’s assume that we create 1 lakh unit, each unit is of Rs.30. 

This amounts to Rs.30 Lakhs which is equivalent to the cost of 1kg of gold. So if anyone wants to buy small units, he can buy 1 unit @Rs. 30. So, one can buy smaller units of gold ETF units the same way we trade stocks on the exchange. 

Q2. How to buy Gold ETF?

You can go to a bank and ask them to buy a gold ETF for you and the bank will do that. Another way is if you take the service of a fund management company. 

You can go and pay to a fund manager of the fund Management Company and they will add gold ETF units in your portfolio. 

For an existing investor, you can buy gold ETF using your Demat and trading account directly from the stock exchange, the same way you follow to buy any stock in the stock market.

Q3. Why people buy gold?

Gold is an emotional asset. The selling of an emotional asset is not easy for many people. When other investments do not give good returns, people start investing in gold. 

Gold investment rises during recessions. People buy the goal to hedge themselves from the unforeseen financial crisis.

Q4. What are the risks of investing in gold ETF?

That is physical gold has no counterparty risk. In contrast, gold ETFs depend on a web of counterparty risk. 

Gold Etf does not actually hold the gold they own. Instead, they depend on a custodian to store and protect their gold. 

This master custodian depends on sub-custodians to move gold bars between trusts’ account an AP’s account. During the financial crisis, any gold moving from the custodian account could be frozen if custodian’s bank fails. 

Q5. Is gold ETF a good investment in India?

Gold Etf may lose charm. Gold is a store of value and not an investment. It just sits in your locker. You have to spend further cash to preserve and protect it to ensure its safety. 

Gold ETF, unlike any other assets like Equity, does not provide an earnings stream. To many, gold is a junk occupying space either in your house, bank or in your portfolio. 

Gold can be taken as a short term arrangement, and not long term. Physical gold is easy to buy but hard to sell. Gold Etf has a lower return. The gold fund is like mutual fund, again lesser return but higher than Gold ETF.

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