Gold ETF is an ideal way to invest in Gold

With the wedding season coming up, Gold jewellery will be on the shopping list of many families in India. Gold is considered to be an auspicious metal in Indian culture. There is a tradition of buying gold on auspicious occasions like Akshay Tritiya, Dhanteras and Deepawali. We also gift Gold to our loved ones on occasions like weddings, Annaprashana etc. Apart from its cultural importance, Gold is an important asset class from an investment standpoint. The two most ways of gold investments in India are buying gold jewellery and buying gold bars / coins. However, Gold ETF is much safer and cost efficient way of investing in Gold. In this article we will discuss about investing in Gold ETF or Gold exchange traded fund..

Importance of Gold as an asset class

  • Gold is seen as a store of economic value over the long term. Over a longer period of time gold is supposed to maintain its purchasing power, and is therefore, considered as a safe asset in our country.
  • Gold and Silver is also seen as a store of economic value over the long term horizon. Over a long period of time these two commodities are supposed to retain its purchasing power and is therefore, seen as a hedge against inflation.
  • Gold plays an important role in asset allocation. Risk diversification is an essential aspect of asset allocation. Historical data shows that Gold is counter-cyclical to equities. Adding Gold to investment portfolio will bring more stability to your portfolio across different market cycles.

Why Gold jewellery is not ideal investment for your child?

Many Indian households start buying Gold, which they can gift to their children at the time of their wedding. While buying gold jewellery is the traditional form of gold purchase, it involves making charges and risk of impurities. Many families start buying gold jewellery for the children’s wedding from a young age. However, by the time the child will reach marriageable age, fashion trends are likely to change and the parents may have to remake the jewellery for the wedding. When you remake a piece of jewellery, the jeweller will not give any value for the making charges of the original set; only the weight of gold will be valued. Further, the jeweller will deduct the impurities from the value of gold. Gold jewellery will invariably contain impurities. For the new jewellery, the jeweller will charge you the cost of making the jewellery and the cost of gold; they will adjust the value of the old gold minus impurities from the price. So, if you remake gold jewellery, you have to pay making charges twice and also lose valueof impurities, even though you have paid for Gold by its weight.

Why Gold jewellery is not ideal investment for your child?

Gold in the form of bars and coins are more suitable for investment purposes because they do not contain impurities and do not involve making charges. However, buying gold in physical form (whether in the form of jewellery or bars /coins) involves the cost of storage and / or risk of theft. In order to avoid the risk of theft, many families prefer to keep their physical gold in bank lockers, for which they have to pay locker charges to the bank.

You need to have Demat and trading accounts to invest in exchange traded funds.

Why you should invest in Gold ETFs?

Buying gold as a financial asset is ideal for investment purposes. Investors can buy gold as financial asset either in the form of Gold Exchange Traded Fund or Gold ETF. Gold ETF in India aims to track the market price of gold and has the same value as that of pure 24 carat physical gold.There is no cost associated with impurities or making charges in when you invest in Gold ETF.

When you invest in Gold ETF, it is held in your Demat account along with your other financial securities like stocks, bonds etc. So there is no risk of theft or storage costs like, bank locker charges, etc. You can sell your Gold ETF at any time on the stock exchanges. When you sell the ETF you will get the value of pure gold. Gold ETFs are the cheapest and safest way of buying and selling gold. Gold ETF price of all the AMCs who have Gold ETF fund is published on their websites on a daily basis.

What are Gold ETFs?

Exchange traded funds (ETFs) are passively managed mutual fund schemes, which tracks and endeavour to replicate returns of a particular market index like Sensex, Nifty, BSE – 100, Nifty – 100 etc or prices of commodities like Silver and Gold, etc. Gold ETF tracks the price of pure Gold. Gold ETFs are backed by physical Gold. One Gold ETF unit is equal to 1 gram of gold and is backed by 99.5% pure physical gold bars (source: AMFI, Knowledge Centre, Gold ETFs).

How to invest in Gold ETFs?

You need to have Demat and trading accounts to invest in Gold ETF or Gold exchange traded fund. You can buy or sell Gold ETFs at market prices on the stock exchange through your stockbroker. Though AMCs do not provide SIP facility for ETFs, some stockbrokers provide SIP like facilities for investing in Gold ETFs. Check with your stockbroker, if you want to invest systematically from your regular savings in Gold ETFs. Since, Gold is counter-cyclical to equities you can benefit from Rupee Cost Averaging by investing systematically in Gold ETFs over long investment horizon.

How to invest in Gold ETFs?

You can sell units of Gold ETF on stock exchanges at market prices. Gold ETFs are settled on T+2 i.e. if you sell your Gold ETF units today, the sales proceeds will be created to your bank account after 2 business days. You have to pay brokerage fees & demat charges for Gold ETFs. Investors should note that unlike stocks, no Securities Transaction Tax (STT) is levied on buying or selling Gold ETFs.

When can you buy / sell Gold ETFs?

Please note that you can buy Gold ETF only during regular market hours from 9:15 AM to 3:30 PM on working days. On auspicious occasions like Akshay Tritiya, Dhanteras and Diwali, the stock exchanges may allow investors to buy / sell Gold ETFs even after regular market hours. Please note that stock exchanges are closed on weekends and holidays.

Taxation of Gold ETF

The minimum holding period for long term capital gains tax for Gold ETFs is 3 years. For investment periods of less than three years, profits from sale of Gold ETF will be added to your income and taxed as per your income tax rate. For investment periods of more than 3 years, long term capital gains tax applies. Long term capital gains in Gold ETF is taxed at 20% after allowing for indexation benefits.

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