What is a Gold ETF?

Gold is considered to be an important traditional investment in many Indian households who buy and hold Gold for generations. Many families purchase Gold on the occasion of marriage or during the festive seasons like Deepawali and Akshay Tritiya etc. With the wedding season coming up in a few weeks, jewellers are expecting a further boost in gold demand. Apart from auspicious and cultural reasons, gold is also an important asset class from an investment standpoint. While the traditional way of buying Gold has been in the form of physical gold e.g. gold jewellery, coins, biscuits etc, investors in the developed markets usually buy gold as a financial asset e.g. Gold ETF or Gold exchange traded fund. Gold ETF in India were launched for the first time around 15 years back. Since then, the popularity of Gold ETF fund have steadily increased even though most retail investors still prefer to invest in physical gold. In this article we will discuss why you should consider to invest in Gold ETF and what it does to your investment portfolio.

Why invest in gold as an asset class?

  • Gold is considered to be auspicious metal in India since time immemorial. Indian households buy gold on auspicious occasions like Akshay Tritiya, Dhanteras, and Diwali etc. Parents gift gold to their children / grandchildren on auspicious events like weddings, Annaprashana etc. With economic growth and rising per capita income in India, demand for gold is likely to increase in the future.
  • Gold, from ancient times, has been seen as a store of economic value over the long term. Over a long period of time gold can retain its purchasing power and is, therefore, has traditionally seen as one of the safe assets all over the world.
  • Gold can be used for asset allocation to diversify portfolio risks because gold is usually counter-cyclical to equities i.e. gold usually outperforms when equity underperforms and vice versa. Adding gold to your portfolio will bring more stability.
  • Historical data shows that over the long term, gold can be a hedge against inflation. Therefore, it can play an important role in your asset allocation.

What are Gold ETFs?

Exchange traded funds (ETFs) are passive mutual fund schemes, which tracks a particular market Index like Sensex, Nifty, BSE – 100, Nifty – 100 etc. or prices of commodities like Gold, Silver etc. and tries to replicate its return. Gold ETF or Gold exchange traded fund track 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. Gold ETF price can be found on the website of www.amfindia.com or on the websites of the asset management companies who have launched Gold ETF in India.

Why Gold ETFs are better investments than physical gold?

  • Gold in physical forms like coins, bar or jewellery may have impurities, which generally get deducted from the value of Gold if you are selling the same or re-making your old gold jewellery. Gold ETFs represent the value of pure gold. There are no impurities in them.
  • Gold jewellery cost includes making charges. Fashion changes over time and you may have the remake the jewellery again, if you plan to gift to your children or their spouses in the future. If you are buying Gold for the purpose of your child’s marriage, it is better to buy it as a financial asset i.e. Gold ETF, so that you can avoid making charges and impurities.
  • To store physical Gold, you may have to incur storage charges i.e. bank locker charges. Gold ETFs do not require separate storage costs.

How to invest in gold ETFs?

  • You need to have Demat and trading accounts to invest in Gold ETF. If you do not have a Demat account, you can contact a stockbroker to open one in your or your family member’s name.
  • During the Gold ETF NFO (New Fund Offer) subscription period, you can subscribe to the ETF with the Asset Management Company (AMC) at par value. Thereafter, the Gold ETF price can be found on the AMC website in whose ETF you have invested.
  • After the NFO period, you can buy or sell units of Gold ETF in the stock exchange, using your demat and trading accounts.

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