Gold is held in many forms such as jewels, bars, cookies, coins, etc. and is passed down from one generation to the next as a family heirloom.
The safety, security and quality of physical gold has always been an area of concern. Gold ETFs have made investing in gold very convenient and seamless. Gold ETFs have been popular in several countries for a long time, but debuted in the Indian markets in the first decade of the 21st century. The concept of gold ETFs is that the fund house uses the money collected from investors to buy the physical gold and it is stored with a custodian. However, fund houses keep an amount collected from investors in bank or short-term instruments mainly to take care of expenses. Normally, one unit of ETF is equal to one gram of gold but it is not necessary in all cases.
Gold ETF units are listed on stock exchanges and are traded regularly. The unit price moves with the movement of the physical gold price since these are backed by physical gold. However, it is noted that the price of a unit of gold ETF (where it is based on a gram of gold) is slightly lower than the price of a gram of physical gold. The main reason behind this gap is that the fund house has to incur expenses like custodial fees for storage and security of the physical gold, administration fee, etc. These expenses are deducted from the total corpus of the collection. These expenses are around 1-1.5% of the total size of the corpus. These expenses actually create a gap between the prices of gold ETFs and physical gold over a period of time.
Gold ETFs are available in fungible form and are credited to the investor’s demat account. Some advantages of gold ETFs are the following:
1. No security, protection or storage issues like physical gold. You save on locker rental and insurance cost.
2. Highly Liquid: You can sell ETFs on any business day and get your money on the third day of trading.
3. An investment equivalent to the price of half or one gram of gold is possible.
4. No purity/quality concerns.
5. No manufacturing or VAT charges, but brokerage is charged at the time of buying and selling ETFs.
6. ETFs are easy to buy and sell: You can buy and sell online or over the phone through your stockbroker.
7. Unlike physical gold, there is no wealth tax for gold ETFs.
These factors make gold ETFs a highly desirable instrument for investing in gold. Therefore, gold ETFs should be in the portfolio of all investors. ETFs also act as hedging tools against rising gold prices. Every Indian household requires gold at the time of marriage of their children and loved ones. If a person systematically invests in gold ETFs keeping in mind his needs for physical gold on specific occasions, he can easily accumulate the required amount over a period of time. Whenever the real need for gold arises, he can sell the ETF units and buy physical gold from the market in the form of jewelry, bars, coins, etc. without worrying about the prevailing high gold prices at the time.
So go ahead and start investing in gold via ETFs.