A gold Exchange Traded Fund (ETF) is a type of investment that monitors the price of gold in the domestic market. One gram of gold will generally be equal to one gold ETF fund unit.
In general, ETFs can track several stock indexes such as the S&P BSE Sensex, the NSE Nifty50, debt indices such as the State Development Loans (SDL) Indices, commodity prices such as gold, and so on. As an investment instrument, the Gold ETF fund delivers returns for investors depending on the price of actual gold. When an investor invests in a gold ETF fund, the fund company invests it in actual gold bars/bullion. All changes in the value of physical gold are instantly reflected in the physical gold investment portfolio valuation. This is due to the fact that the share price of a gold ETF is determined by the physical gold price in real-time.
As a result, investors now have a more straightforward way to gain exposure to the yellow metal via gold ETF funds. They can buy and sell ETF units in real-time during exchange trading hours. Consumers can research gold ETF funds and gold ETF share prices on the BSE/NSE websites to make a wise gold investment.
Gold ETF Advantages
Protective investment option
Gold is widely regarded as a defensive investment option that not only helps to cope better with inflation but is also preferred during periods of risk aversion. It makes it logical to allocate a portion of your investment portfolio to gold. Because gold ETFs are digital investments, they make such allocations easier and more straightforward. ETF units are traded digitally via the Demat account. As a result, investors do not need to be concerned about the storage and security of their gold investment. In the case of physical gold, however, bank lockers or secure wallets are frequently required for the safe custody of the expensive object.
Removal of the possibility of impure Gold
The underlying investment in physical gold is made exclusively in hallmarked gold and generally with a minimum fineness (or purity) of 995 parts per 1000 (99.5%). Furthermore, unlike investing in actual gold, investors receive investment valuation based on the benchmark, so they do not need to be concerned about the quality. In the case of physical gold, the investment value may be at the discretion of the jeweller from whom the gold is purchased.
Similarity in pricing
Gold ETFs are exchanged in real-time on the markets. As a result, regardless of geographical location disparities, one can invest or liquidate the investment at current trading prices. In the case of actual gold, costs might vary from city to city or even from jeweller to jeweller, even within the same city or area, when fees are taken into account.
Cost-effective Gold investment strategy
Because gold ETF NAV moves in lockstep with benchmark gold prices, it might be viewed as a viable alternative to actual gold investment. Furthermore, investors are not required to bear additional costs, such as quality inspection fees, minting/making fees, storage fees for the secure custody of gold, and so on. They can keep track of their investments through their Demat account.
The exit load
Unlike certain mutual fund schemes, there are no exit load implications if the investor wishes to liquidate the investments soon after placing an investment. However, other charges, such as brokerage fees, may be applied.
Increased liquidity
Gold ETFs are traded on national stock exchanges, and investors can sell their holdings by executing a sell trade through their trading accounts. Once the order is executed, the sale proceeds are credited to the Demat account in accordance with the stock exchange's settlement cycles. Furthermore, investors can keep track of their Gold ETF investment by visiting the stock exchanges' websites and checking the real-time valuation of the ETF units.
A comparison of gold ETFs, gold bars, and jewellery
|
Particulars |
Gold ETFs |
Gold bars/Jewellery |
|
Charges and transaction costs |
Cost-effective
as transaction costs are pre-determined and minimal |
Minting
and wastage charges make up a higher proportion, thereby lowering the
effective investment in gold |
|
Investment Security |
Investment
held in digital Demat account and thus, secure |
Arrangements
must be made for safe custody like bank lockers/ safe wallets, etc. |
|
Quality Issues |
No
concerns on the quality of investments, as the investor makes an investment
in digital form |
Quality
of gold has to be verified to ensure proper value for the invested amount |
|
Investment Convenience |
Most
convenient, as the investment can be made online |
Investment
needs to be made through city jewellers/ trading houses etc. |
|
Transaction Cost |
Transparent
and real-time pricing through stock exchanges |
Pricing
may vary from city to city and from jeweller to jeweller |
Why should you buy a gold ETF?
Portfolio diversification across asset classes aids in the establishment of long-term wealth. Furthermore, gold has a negative association with stock markets and is often seen as safe. It has served as an efficient means to cope with inflation and may help maintain portfolio stability during market corrections. As a result, it makes sense to diversify through gold investment.
So, gold ETFs are preferable for such investors who want to invest in gold for investment and portfolio diversification. It is a less complicated way to invest in gold without having to worry about the safety and quality of the yellow metal. Furthermore, because gold ETFs are traded on stock exchanges online, it is possible to invest in them from the comfort of one's own home.
Nonetheless, with a wide range of debt and equity investment options available, the proportion of gold should normally not exceed 10% of the whole portfolio.
DISCLAIMER: Mutual Funds are subject to market risks. Please read all scheme-related documents carefully before investing.
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