Investing through Gold ETFs

Indians' love for gold is no secret. For long it has been one of our go-to investment products. Generally, people don't consider the incremental costs involved while making such a transaction and end up paying more than the value of gold. The next obvious question would be how?

Well, when you buy jewellery in gold, the jeweller charges for not only the cost of gold but also for its making charges & his margin. Later on, this jewellery is kept in lockers to safeguard it from thievery which adds up to the cost. Hence, you end up paying for the jewellery throughout its holding period.

But how can an investor invest in gold and not incur all these costs?

One of the many ways can be through investment in Gold ETFs. A Gold ETF is an exchange-traded fund that can be bought and sold only on stock exchanges. Owning it in the form of paper gold which is available at a price almost equal to the actual price of gold, fulfills the investment objectives equally.

In simpler terms, Gold ETF is an equity stock that derives its value from the price of physical gold and is traded online on the NSE or BSE. What's more, one Gold ETF unit is equal to 1 gram of gold and is backed by physical gold bars of 99.5% purity. Buying Gold ETFs means you are purchasing gold in an electronic form.

The features of Gold ETF are as follows:

1.The prices of ETFs surges or dips in sync with the prices of physical gold. They do not compromise on the purity factor and promises uniform availability and real-time pricing across the country.

2. Gold ETFs can be purchased or sold in small amounts, in any denomination.

3. Investors who are looking to diversify their investments can go for ETFs as returns are guaranteed amidst market volatility.

4. When you redeem Gold ETF, you don't get physical gold but receive the cash equivalent.

5. ETFs can be purchased online and placed in the DEMAT account and hence it offers flexibility and no fear of theft is involved.

6. ETFs do not attract wealth tax, sales tax, security transaction tax, VAT charges.

7. ETFs are accepted as collateral for securing loans.

8. Gold ETFs are subject to market risks impacting the price of gold & SEBI Mutual Funds Regulations.

Who can invest in Gold ETFs?

Gold ETFs are suitable for investors who have an affinity to invest in gold but do not want to invest in the physical form of gold. Gold ETFs offer some of the same defensive-asset-class traits as bonds, and many investors use it to hedge against economic and political disruptions, as well as currency debasement. Gold tends to rise when the dollar is weak, so if your investment portfolio holds assets that have risk exposure to the dollar's downside, purchasing a gold ETF may help you hedge that exposure. Conversely, selling a gold ETF can act as a hedge if your portfolio has exposure to the upside.

How to invest in Gold ETFs and redeem Gold ETFs?

Gold ETFs can be bought on BSE / NSE through the broker using a DEMAT account and trading account. A brokerage fee and minor fund management charges are applicable when buying or selling gold ETFs. As per their requirements, investors can invest in gold ETFs either at regular intervals through systematic investment plans (SIPs) or can invest in one go by parking their lump sum amount.

Gold ETFs can be sold at the stock exchange through the broker using a DEMAT account and trading account. When one liquidates Gold ETF Units, one is paid as per the domestic market price of the gold. AMCs also permit redemption of Gold ETF Units in the form of physical gold in the 'Creation Unit' size, if one holds the equivalent of 1kg of gold in ETFs, or in multiples thereof.

Do Gold ETFs pay dividends?

Gold ETFs that hold the physical precious metal or that hold gold futures contracts do not offer dividend yields. Dividends are only available with equity-based gold ETFs that invest in the stocks of companies engaged in the gold industry.

How are gains on Gold ETFs taxed?

Gold ETFs are treated as non-equity investments and taxed accordingly. Short-term capital gains on units held for less than 36 months will be added to investor's income and taxed as per the applicable slab rate. Long term capital gains on units held for more than 36 months will be taxed at 20% after providing for indexation.

The conclusion can be thus encapsulated in a single sentence - "Gold ETFs are those instruments which combine the flexibility of stock investment and the simplicity of gold investments."