All about Gold ETF, What is a gold ETF, All details you want to know about Gold ETF and Gold ETF Trading

All about Gold ETF, What is a gold ETF,  All details you want to know about Gold ETF and Gold ETF Trading.

A Guide to Gold ETF.

There is a way to invest in gold without actually holding the physical material in coins, bars or jewellery form.  Suppose, if we are investing or buying  gold jwellery etc what we are facing is that  the quality of the gold is to be identified whether it will be good 916 gold or not, or we are not sure whether we will get actual prize on selling the same.  But here if we are buying we can be assured that the quality of the gold you own is without doubt of the highest order, something you can’t always be sure of with your local jeweller.

In this case we  can make an investment of gold   by means of  buying a gold Exchange Ttraded Fund (ETF) and own it  in dematerialised form. We  might ask why would anyone like to buy gold without being able to see, hold and feel the metal. Here we explain to you what are ETFs  and why they might be preferable to owning physical gold.

  

WHAT IS A GOLD ETF?

Exchange Traded Funds (ETFs) are instruments that are listed on a stock exchange and that represent and ownership in an underlying security, commodity or asset. A gold ETF is an instrument that represents an ownership of gold assets. When you buy a gold ETF, you get a contract indicating your ownership in gold equivalent to the rupee amount of your investment.

Each unit of gold in the fund that you can buy is equal to 1 gram of gold. You will never get to see or receive delivery of the gold you own – you will only have a contract that represents your ownership interest.

In order buy a gold ETF you will need to have a demat account to hold your ETF units and a share trading account with a registered broker to trade your units. When you want to sell your ETF, all you have to do is to put in a sell order and you get the then prevailing price as trading on the exchange.

Fund management companies that sell gold ETFs are heavily regulated, so you don’t need to worry about buying an investment in gold without getting delivery of the metal. While you will face the risk of a rise or fall in gold prices, you should feel totally secure about holding gold in ETF form. In fact, the ETF is expected to buy and have in storage matching amount of gold for the amount of money that investors have put into the ETF. This gold is held on your behalf at an appointed custodian for the ETF.

BENEFITS OF INVESTING IN A GOLD ETF

1. Pricing transparency: If you go to buy gold from a jeweller, you will never be sure if the price is a right. In fact, different jewellers might price the same item differently. Compared to this, ETFs have a very transparent pricing mechanism.

So, you can be sure that when you buy or sell gold through ETFs, you would be getting the existing price at that point in time. You don’t have to worry that the jeweller is making a fool out of you, nor do you have to bargain like in a bazaar.

2. Purity: If you own a gold ETF, you don’t have to worry about purity as the gold held against the money you have invested in the ETF will be of the highest purity. The custodian will certify that the purity is 995 or above.

This is not something that you can be confident about when you buy from your local jeweller, and you might be only become aware of this when you are sell your gold.

2. No risk of storage: If you own physical gold, you are always going to be worried if its stored safely at home or in a locker, away from anyone who could potentially run away with it. With a gold ETF you don’t have this worry.

DISADVANTAGES OF A GOLD ETF

1. No physical asset: How well do you think will it be received if at your daughter’s wedding you gave her a gold ETF instead of jewellery? Somehow it just doesn’t have the same feel to it. So, for someone who needs to own physical gold, holding an ETF might not be suitable.

2. Transaction costs and annual charges: Investors have to bear the stock brokerage charges as well as other statutory levies as applicable. While there are no entry and exit loads when investing in a gold ETF, investors might also have to bear some annual recurring expenses as stipulated by the regulations. There are no such expenses if one owns physical gold.

3. Tracking error: A gold ETF attempts to track as closely as possible the price of gold in the international markets. However, sometimes this results in a tracking error where the price of the ETF might not be 100% the same as the spot price of gold. Ultimately you lose out as an investor if the tracking error is very high.

TAX IMPLICATIONS OF INVESTING IN A GOLD ETF

Like physical gold, investment in a gold ETF is also treated like investment in any capital asset.. A gold ETF is treated like a debt mutual fund. If you sell your ETF before one year, you will taxed as per the income tax slab that you fall in. If you sell after one year, long-term capital gains of 20% will apply.

Unlike owning gold in physical form, holding a gold ETF does not attract wealth tax.

HOW EASY IS IT TO SELL A GOLD ETF?

A gold ETF is havingh  higher liquidity compared to  the ordinary physical gold.  We can sell it at any time during the trading hours of exchanges  when you find that it the right time to sell the gold and to get the desired price.

The price you will  be getting  get for selling your gold ETF will generally be closer to the market price of gold. You don’t have to suffer the embarrassment of having to sell your jewellery or have to go through the emotionally draining process of negotiating a price with your jeweller.