The recent budget decision to introduce Gold Exchange Traded Funds with ‘gold’ as the underlying asset will facilitate buying and selling of the yellow metal, even in the smallest of units. This is a welcome move that signifies
What is ETF?
ETF is normally a MF scheme that is listed on stock exchange & traded like common stock. The traded price of the ETF units on the stock exchange reflects, before expense, the value per unit of underlying assets of the fund. They enable investors to gain exposure to indices or underlying assets at a lower cost than any other form of investing.
Investing in Gold
Gold is one of the most widely held precious metal, appeal to almost all kinds of investors. It provides investors a different asset class to diversify their portfolio and a hedge against inflation. It is also used by Central banks as a substitute of currency to hedge against financial & credit risk. Apart from this gold is also used for jewellery and some industrial purpose.
Gold Demand pattern of Gold in
- In 2005,
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- Jewellery accounts for 60% of total demand in
What is GOLD ETF?
Gold ETFs represent an easy way to gain exposure to the gold price, without the hassle of buying gold directly. Investors can buy or sell units in the Gold ETF, with each unit representing a certain gram’s of gold held by the fund. Though investors can buy Gold ETF units from the fund house during the initial offer period, subsequent transactions will have to be routed through the stock exchanges, where the units will be listed and traded at NAV-based prices. Like other mutual fund products, Gold ETFs will publish their NAV on a periodic basis and this would be linked to the prevailing gold price. Under the present regulations, Gold ETFs in India will track London gold prices expressed in US dollars, and will represent ’standard’ gold of 99.5% purity.
| S. No. | Parameter | Physical Gold | Gold ETF |
| 1 | Purchasing Gold | Physical | Dematerialized |
| 2 | Premium for Purchase | High/Very High | N.A. |
| 3 | Making charges | High/Very High | None |
| 4 | Quantity that Can be purchased | Any amount/coins From 5gm | Multiple of 1gm |
| 5 | Impurity Risk | High/Low | Nil |
| 6 | Storage | Locker | Demat A/c |
| 7 | Risk of theft | High | No Risk |
| 8 | Liquidity | Low | High |
Why invest in GOLD ETF?
- GOLD ETF will provide a screen-based platform to investors to accumulate quality gold in small lots. For example, a father wanting to gift gold to his daughter need not but the metal (or the jewellery) only when he intends to gift her, instead he can start buying in small lots.
- Gold has proven to be a good hedge against inflation and maintained a long term value. Gold is not highly correlated with other financial assets such as stocks, currency and bonds, which are directly affected by the country’s economy.
- It offers a good diversification and reduces overall risk/volatility of investments.
- Gold has a ready & wide acceptability. Hence, exchanging it for cash or raising money against gold is easier.
- Gold ETF backed by the standard hallmark quality can provide a safe & liquid investment avenue through price volatility in the short term cannot be eliminated.
Disadvantage of investing in GOLD ETF
One, a badly timed purchase can expose the investor to the risk of value erosion, if gold process decline. Second returns on Gold ETFs may be lower than those on physical gold by virtue of management fees, transaction costs and other operational expenses levied by the fund house on the fund’s NAV. Third, if the ETF units are not actively traded in the stock market, you may not be in a position to exit your holdings at the time or price of your choice.
Tax Implication of investing in Gold ETF
| S. No. | Tax | Gold ETF |
| 1 | Wealth Tax | Not Applicable |
| 2 | Short Term Capital Gain Tax | Applicable Before 1 year |
| 3 | Long Term Capital Gain Tax | Applicable After 1 year |
Who can invest in GOLD ETF?
- An Individual Resident/ Non Resident Indian.
- A Non-Individual: - Firm, HUF, Banks, Trusts, Companies etc.
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An investor who applies for GOLD ETF should have a Demat Account
source: Investment Monitor (Magazine)
