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Gold ETF, also called an exchange-traded fund, serves as an alternative to physical gold. Physical gold has traditionally been viewed as a skeptical investment option due to its cumbersome nature and potential security risks. This is when gold ETF comes into play, where you can invest in gold without actually owning physical gold. In short, gold ETFs are paper or digital representations of physical gold. Each ETF unit represents one gram of 99.5% pure gold, making it a convenient and accessible way to invest in gold. As a commodity-based mutual fund, gold ETFs solely invest in gold as the underlying asset, offering a focused and simplified investment option.
Gold ETF primarily allows for diversification of the investor’s financial portfolio by providing investment exposure to gold-related industries like gold mining, gold jewelry manufacturers, etc. It also offers a simplified and hassle-free way to invest in gold, making it a convenient option for many investors seeking to enhance their investment portfolio. The ease of accessibility and liquidity provided by Gold ETFs make it an attractive investment opportunity for those who prefer a more streamlined investment process.
Furthermore, gold ETFs offer protection against market fluctuations. Not only that, but they also serve as a convenient way to bet against the price of gold. For example, if the gold price decreases by 10% on a given trading day, you don’t have to worry about any potential loss because the short gold ETF would increase by 10%, which will benefit you from gaining back your loss. And this, in turn, can be utilized to limit the financial damage.
These highly-rated defensive assets are considered a reliable tool for ensuring investments against economic fluctuations and currency debasement. Moreover, gold prices tend to rise when major currencies like the US dollar weaken, providing an opportunity for individuals to profit from the drop in currency value.
Taxes imposed on gold ETFs are similar to those imposed on the selling and purchasing of physical gold. Long-term capital gains on gold ETFs held for more than 36 months are taxed at a flat rate of 20%, with the benefit of indexation. Short-term capital gains, on the other hand, are taxed at the individual’s applicable income tax rate.
Furthermore, when selling Gold ETFs, securities transaction tax (STT) and brokerage charges are applicable.
It’s essential to consider the tax implications before investing in Gold ETFs. One should also consult a tax professional for advice on how to manage and reduce their tax bill.
Here’s how you can get started:
Step 1: Open a Demat Account
The first step to investing in gold ETFs is to open a demat (dematerialized) account with a registered stockbroker. This account will hold your gold ETF units in electronic form.
Step 2: Provide the Necessary Documentation
To open a demat account, you’ll need to provide the necessary basic documentation, such as your PAN card, proof of address, and identity.
Step 3: Choose a Gold ETF and Buy Units
Once you have a demat account, you can choose a gold ETF and buy units. Gold ETFs are traded on the stock exchange, so you’ll need to place an order with your stockbroker to buy the units.
Step 4: Watch Your Units Get Credited to Your Demat Account
After buying the units, they will get credited to your demat account. You can track your investment and monitor your returns using your demat account.
Step 5: Redeem Your ETF Units
When you’re ready to redeem your ETF units, you’ll receive the cash equivalent of the value of gold based on the prevailing market price. The funds will be deposited in your linked bank account.
Investing in Gold ETF Funds can provide investors with several significant advantages. Let’s have a closer look:
1. Easy Trading: Unlike physical gold, Gold ETF Funds can be traded on the stock exchange just like shares. This means that investors can buy and sell units of Gold ETFs just like equity shares, providing them with the ease and flexibility of trading in a stock market. As added information, gold ETF is traded on platforms like the National Stock Exchange of India (NSE) and Bombay Stock Exchange Ltd. (BSE).
2. No Entry or Exit Loads: One major benefit of investing in Gold ETF Funds is that there are no entry or exit loads involved. This means that investors can invest in and redeem their units of Gold ETFs without incurring additional costs.
3. Cost-efficient: They do not require high upfront costs for storage and insurance. Also, gold ETFs often have lower management fees than actively managed mutual funds, making them an attractive option for cost-conscious investors.
4. Tax Benefits: Gold ETFs are treated like non-equity mutual funds for taxation purposes. This means that if they are held for more than three years, the long-term capital gains arising from the sale of units are taxed at 20% with indexation. This provides investors with a tax-efficient way to invest in gold.
5. Less Market Risk: Gold ETF funds offer a great opportunity to diversify your investment portfolio and reduce market risk. This way, your investment won’t be impacted significantly due to volatility in other markets.
6. Usage As Collateral: Using Gold ETFs as collateral can be an effective way to secure a loan from a financial institution. Compared to traditional hypothecation, this method is extremely convenient, and the entire process takes significantly less time. Because of these benefits, it’s a popular choice among borrowers who are looking for a faster, easier way to access the funds they need.
While the return rates of the following gold ETFs may vary, here is a rough estimate of the percentage of the rate of returns for the specified time period.
Time period | Rate of returns (%) |
1-year | 4.1 |
3-year | 8.5 |
5-year | 10 |
Time period | Rate of returns (%) |
1-year | 4.1 |
3-year | 8.6 |
5-year | 10.2 |
Time period | Rate of returns (%) |
1-year | 4.5 |
3-year | 8.7 |
5-year | 10.4 |
Time period | Rate of returns (%) |
1-year | 4.3 |
3-year | 8.6 |
5-year | 10.3 |
Time period | Rate of returns (%) |
1-year | 4.1 |
3-year | 8.8 |
5-year | 10.3 |
In conclusion, Gold ETFs provide investors with a convenient, cost-effective, and flexible way to invest in gold. With low expense ratios and high liquidity, gold ETFs offer advantages over traditional forms of gold investment, such as physical gold. Overall, Gold ETFs are a better investment option that could provide long-term returns and stability to any investment portfolio.