This article gives an introduction to Gold Exchange Traded Funds (ETFs).
We know that Gold is a very important part of any portfolio, and most Indians buy Gold in the form of jewellery, which is the worst possible way to invest in gold! (Please read “Have you invested in jewellery?” for more details)
We also discussed various options regarding investment in Gold in “Get the glitter – How to buy gold“.
But the best way to invest in Gold is through a Gold Exchange Traded Fund (Gold ETF). Let’s see why.
What is Gold Exchange Traded Fund (Gold ETF)
In simple terms, you can say that Gold ETFs are like mutual funds – they collect money from many investors, and invest it on their behalf. The difference is that MFs invest the money in shares and debt instruments, whereas Gold ETFs invest your money in physical gold.
Gold ETFs buy gold from very reliable sources on your behalf, and take care of its safekeeping. In return, they issue you units of the ETF, each unit representing roughly 1 gram of gold. These units are traded on the stock market, and can be bought like ordinary shares.
The NAV of these units fluctuates based on their demand and supply, and usually mirrors the price movement of physical Gold. The charges regarding the storage and safekeeping of physical gold purchased on your behalf are deducted from the NAV of the units.
Advantages of Gold Exchange Traded Fund (Gold ETF)
Ease
If you want to invest in gold, you just purchase the units of the ETF. The Gold ETF has done all the hard work of finding reliable sellers, buying from them, storing the gold and its safekeeping. You just sit back and relax! And if you want to sell, no need to go to the market to a jeweler – just sell the units like ordinary shares, and you’re done!
Safety
Since gold is not physically held by you, you don’t have to worry about its safekeeping! That’s a big relief!
Quality
If you are buying physical gold, your first concern would be to be sure about the quality of gold. With ETFs, that worry is gone too – the ETFs buy only from the most reliable sellers, and so, you are in safe hands!
Small Investments
With Gold ETFs, you can invest in as less as 1 gram of gold. Is that possible with any other option of buying gold? This also means that you can make regular (maybe monthly) investments in gold, just like Systematic Investment Plans (SIPs) of Mutual Funds (MFs).
No Wealth Tax
You need to pay wealth tax on gold that is physically held – be it jewellery, coins or bars. But there is no wealth tax on gold held in the form of Gold ETFs.
Liquidity
If you want to sell physical gold, you would need to go to the few jewelers available in your area, and would have to settle for the best price offered by one of them. Compared to this, Gold ETFs are traded in open markets in a transparent manner, and they have ample liquidity. This means that you get a price that is very close to the actual prevailing price of physical gold.
There was a time when shares were issued and traded in physical form. You held share “certificates”, and had to “deliver” these certificates to the buyer when you sold your shares. Then, demat came, and all the hassle with holding physical shares was gone.
Now, it is time to embrace demat gold in the form of Gold ETFs, and enjoy the benefits all over again!