This Festive Season, dig in to Gold ETFs

Gold has always had a special significance amongst Indians for varied reasons such as for its auspicious sentiments, high emotional quotient, for its high perceived value. It’s even considered as a gifting option – reinforcing closeness of relationships. In India, people buy gold all season but during special occasions like weddings, festivals or special events, it becomes a mandate.

Barring the auspicious significance, for long Gold has been one of our go-to investment products. Gold continues
to command long term value, considered as a safe haven, a hedge against inflation; asset allocation,etc. Investment in gold could be in the physical form such as jewellery, gold coins or bars but one of the most popular involves buying shares of gold exchange-traded funds (gold ETFs) i.e. owning it in paper form.

Advantages of investing in gold ETF

  • ETFs, give investors a chance to own small amounts of many different investments within a single fund – letting them get diversified exposure to gold without having to invest huge sums of money.
  • Owning gold in physical-form such as jewelry, gold coins or bars comes at a huge cost, given the making charges, storing costs, jeweler margin, etc., whereas owning it in paper form like gold exchange-traded funds (gold ETFs) comes at a price closer to the actual price of gold.
  • The transparency in pricing is another advantage. The price at which it is bought is probably the closest to the actual price of gold.

How to invest in gold ETFs

Like any other company stock, Gold ETFs trade on the cash market of the National Stock Exchange. It can be bought and sold continuously at market prices. If you wish to invest in gold ETF, all you need is a trading account with a share broker and a demat account. Like any other stock investment, you can either invest in lumpsum or at regular intervals through systematic investment plans. Here’s how you can invest using these simple steps:

Step 1: Open an online trading and demat account with a stock broker
Step 2: Log in to the website of the broker’s online trading portal using your login ID and password.
Step 3: Choose the Gold ETF you want to invest in
Step 4: Place the buy order for the purchase of a specified number of Gold ETF units
Step 5: Web system debits your bank account (Fund transfer through linked savings account)
Step 6: Units are credited to your demat account on trade day + 2nd day

Things to know before one invests in gold ETFs

Know the fund type – There are broadly two main types of gold ETFs. The first kind focuses on the commodity aspects of gold, seeking to track the price changes of the gold itself. The other focuses on investing in the companies that specialize in gold i.e. mining stocks, which directly extract the yellow metal from their mining assets; and gold streaming stocks, which provide financing to gold miners in exchange for the right to purchase a set amount of a mines gold production at a discounted price.
Know the charges – Primarily two kinds of costs are associated with investments – expense ratio for managing the fund, and broker costs considered during buying and selling units.
Know the right Gold ETF for you – There are about twelve Gold ETFs in the market. It is best to opt for funds with lower tracking error and higher trading volumes. Unlike other investments, there is no lock-in of funds, so buying and selling can happen during trading hours. It is advisable to avoid partial withdrawals or early exits, and for best results, link your investments to a long term goal.
Know the Taxation – Short-term capital gains on units held for less than 36 months will be added to investors 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.

There’s no one perfect ETF for every gold investor, but different ETFs will appeal to each investor differently, depending on their preferences and long term goals. You can start by holding not more than 10 percent of gold in your portfolio. Once prices dip, you can consider allocating more to the asset else sell when allocation towards gold in your portfolio goes up.