Before we get into the topic what is gold ETF, let’s just get a brief about gold.
Every time I think about gold, I remember Uncle Scrooge’s signature dive into the gold coins.
Uncle Scrooge introduced me to the gold.
I loved seeing his obsession with gold.
But when I grew up a little bit more, I realized, it was not just him, everyone around me loved gold so much.
India is a country of gold lovers.
Do you know, that the world’s biggest private stock of gold is held by Indian households, which is approximately 25,000 tonnes!!
And not just that, India is the biggest importer of gold in the world.
It is not so tough for us to guess where this gold is used.
The majority of gold is used in making jewelry which remains idle after use in marriages and special occasions.
For centuries, we have been using gold jewelry as a hedge against tough times.
And gold never failed us.
The value of our fiat currently will decrease over time but gold moves up in line with inflation.
That way gold is a more powerful currency than our circulating currency.
Because of this deflating nature, gold has attracted many investors.
And with time, many options became available to invest in gold.
You can buy physical gold or virtual gold.
You can invest in sovereign gold bonds, or you can invest in gold mutual funds or gold ETFs.
If you do not know about these instruments, no need to worry.
We will discuss all of them here and I will tell you why gold is more convenient than all other instruments.
So first of all,
What is gold ETF
The full form of the ETF is Exchange exchange-traded fund.
What does it mean?
Exchange-traded funds are funds that track various indexes like Nifty or Sensex. So, these funds are a basket of stocks that are listed on an index.
So, if you wish to get a return similar to an index like Sensex, you can invest in an ETF.
The same principle works in index funds.
But the difference in an ETF is that you can hold it in your demat account and trade it on a real-time basis in the market.
I hope now it is easy for you to guess what is a gold ETF.
Gold ETFs track the price of gold. ETFs purchase the same amount of physical gold that you invested.
So, you do not have to worry about the safety of your gold.
You can conveniently have gold in your demat account, just like your other stocks.
Another important thing you should know is
How Gold ETF works
As we discussed before, gold ETFs are one of the options available to invest in gold.
The only difference here is, that you can invest in gold through your demat account and hold gold just like your stocks.
But, before you start investing in a gold ETF, you should know some facts about how a gold ETF works.
We will discuss those interesting facts one by one.
Gold ETF is always backed by physical gold.
So, whenever you invest in a gold ETF, the same amount of physical gold is purchased and held by the custodian on your behalf.
You never get to touch that gold, as you are buying and selling it on your demat account.
AUM of the Gold ETF always remains the same
Now, here Gold ETFs are different from mutual funds.
In mutual funds, whenever you invest or
redeem, the total value of the fund increases or decreases daily.
While here in ETF, units are just transferred from seller to buyer on exchange. So, the value of the fund remains the same at any time.
Price of the gold is a driving factor of gold ETF
Unlike index ETF, where many factors are responsible for ups and downs, in gold ETF only one factor is responsible for its movement. And that is the daily price of physical gold.
How to invest in gold ETF
Investing in gold ETF is a completely online process.
It is a very simple and convenient process if you are a stock market investor.
It is just similar to buying stocks.
You just have to log in to your Demat account and explore various Gold ETFs from the search option.
If you are not a stock market investor, you will have to open a demat account and then you can invest in a gold ETF.
The price movement of gold ETF is directly linked with the price of physical gold.
So, plan your purchase accordingly as per the trend of gold prices.
How to buy gold ETF in India
Despite being the biggest importer of gold, India does not have that much AUM in gold ETF.
India has roughly around 1 billion USD in total assets under management in gold ETFs, which is very low.
The majority of our gold investment is in physical gold, which poses the risk of theft and robbery.
So, instead of purchasing physical gold and bearing the cost of bank lockers, it is advisable to invest in gold ETFs.
In India, you can invest in gold ETF via your demat account.
There are very famous gold ETFs in India like SBI gold ETF, HDFC gold ETF, UTI gold ETF, and Axis gold ETF.
These are old fund houses in India, so, I would advise starting with trusted brands. If you check their history of returns, you will find that these are the best gold ETFs in India in 2021.
Gold ETF vs Physical gold
Gold ETF tracks the price of physical gold. So, every uptrend or downtrend in physical gold will be followed by gold ETF.
The only benefit of a gold ETF is that you are virtually investing in gold without the need to worry about where to put your gold for safety.
Be it physical gold or gold ETF, one thing should be clear in mind the basic purpose of gold is to hedge against tough times and not wealth-building like equity.
If you follow the equity market and gold price movement, you will notice that both have very low correlations.
So, when the equity market is in an uptrend, gold will be steady and during an economic downturn, the gold price will see upside movement.
So, in your portfolio, along with stocks you can have 15-20% gold ETF to hedge risk of equity.
So, the basic purpose of a gold ETF is to hedge risk. You should not see gold ETF as an investment option.
Difference between gold ETF and Gold Fund
Both words look very similar but both have different objectives of investment.
In a gold ETF, physical gold is held by custodians against your investment.
So, gold ETF closely follows the price of physical gold.
While the gold fund is a different thing.
Gold fund is a type of mutual fund where your money is invested in various companies, that are involved in business related to gold.
Those companies can be gold mining companies or other related companies in the gold value chain.
Gold ETF vs Sovereign gold bonds(SGB)
Sovereign gold bond is a good option provided by the government of India as an alternative to physical gold purchase.
Sovereign gold bonds are suitable for investors who are looking for regular income from gold investments.
Sovereign gold bonds provide 2.5% fixed annual interest, which is not the case in gold ETFs.
But when it comes to liquidity, you can sell gold ETF in the secondary market in your demat.
It is not possible in SGB. In SGB maturity of your investment is 8 years. You will have to stay invested and can not withdraw anytime as per your wish.
From a taxation point of view, income from capital gains from gold ETF is taxable.
While in SGB, if you stay invested till the maturity term (8 years), your income from interest will not be taxable.
In SGB, withdrawal is available after the 5th,6th, or 7th year, but your capital appreciation will be subject to taxation.
So, the moral of the story, is if you are looking for long-term investment and fixed income then go for SGB.
If you are looking for a hedge against risk and looking for liquidity, then go for a gold ETF.
Gold ETF is a good alternative for investment in gold if you have a demat account. Just like physical gold, gold ETF should not be purchased for capital appreciation. Because it cannot build wealth like equity. It just provides safety against tough times. So, some portion of your portfolio should be invested in gold ETF.
I think I have covered everything about gold ETF. What do you think about it? Let me know in the comment section.
Here are some frequently asked questions about gold ETF
Is gold ETF safe ?
Gold ETFs are purchased to hedge risk. If you are asking about regulatory safety, your investment is in safe hands. In India, Stocks and funds are regulated by SEBI and SEBI has a good reputation of safeguarding the interests of investors. Whenever you invest in a gold ETF, the same amount of physical gold is held by the custodian on behalf of you. So, your investment is backed by real gold.
Can a gold ETF be converted to physical gold ?
Yes, gold ETF be converted to physical gold. But there are some criteria to be followed for the same. First, it has to exceed a certain size of gold. Like if your investment is worth 500 gm of gold to 1 kg of gold, it can be converted to physical gold. Size criteria varies.
Can I start a gold ETF SIP ?
Answer is both yes and no. Because the minimum criteria for investment in gold ETF is 1 gm gold. Price of gold keeps fluctuating. So, the price of 1 gm does not remain the same. So, if your SIP amount is lower than the price of 1 gm of gold, it will not be possible to invest. So, it is advised to make a fresh purchase as per your convenience.