Gold ETF: A Better Alternative to Physical Gold

Gold Exchange Traded Funds or Gold ETFs are slowly becoming popular among investors as a better alternative to gold investment. Gold ETFs are like regular ETF and its price of a unit depends on the price of pure gold.

If you are looking to invest in gold, Gold ETF can be better option than gold jewellery.

Advantages of Gold ETF over physical gold:

Compared to physical gold, one of the major differences is that the gold ETF generates income, while the physical gold doesn’t.

Furthermore, physical gold comes with certain manufacturing charges, which do not apply to the gold ETF. However, as an investor, you can still get exposure to the gold market. In case you are looking forward to beating inflation in the long run, gold ETF will be a fantastic investment choice.

Moreover, gold is less volatile investment option when compared to other assets. Here, one unit equals one gram of pure gold; thus, it provides the benefits of the liquidity of the stock market and investments in gold. However, you must keep in mind that the gold ETF’s value fluctuates proportionally with physical gold’s market value.

Who should invest in Gold ETF?

Gold ETFs are perfect for investors looking to diversify their portfolio and get exposure to the gold market. Investors with equity heavy portfolio can look at investing around 15% of their portfolio in gold ETFs.

This investment involves lower risks and suits conservative investors.

Individuals who want to take exposure in gold but are unwilling to spend money on storage and added taxes as required for physical gold.

Features and benefits of Gold ETFs

Gold ETFs have many features and benefits. Here are some of the benefits of Gold ETFs:

  • Transparency:

Just like shares, the live gold prices are available. You can understand your portfolio value by checking the gold prices for a particular day or hour.

  • Easy trading:

The minimum bundle or lot you require to buy to trade in gold ETFs is one unit, which accounts for one gram of gold. You can buy/sell these units during the trading hours through your trading hours. You will just need a Demat account to carry out

  • Cost-effective:

There is no entry or exit limit load if you invest in a gold ETF on the stock exchange. There are lower brokerage charges, which would be around 0.5% to 1%.

  • Lower risk:

Compared to equity investments, gold prices tend to be less volatile in the short run.

  • Diversify your portfolio:

Proper diversification can help to diversify your portfolio and give you optimised returns.  

For instance, if the market is going through a downturn and your equity returns are down, Gold ETF acts as the safety net. It is because different assets give different returns during the same market cycle.

Gold ETF is a defensive investment option as it is used as a hedging instrument against currency depreciation, economic or political upheavals.  

  • Tax benefits:

Gold ETFs are taxed like non-equity funds i.e., long term capital gains are applicable on units redeemed after three years. You will be liable to pay the capital gains tax if you have received a profit. Taxes are applied to both short-term and long-term investment types.

  • Long-term capital gain tax – For investments that are 36 months or longer, and you would have to pay a capital gains of 20% after indexation benefits. 
  • Short-term capital gain tax – In this type, the capital gains tax is added to your current tax slab and is taxed accordingly.

You don’t have to pay VAT, wealth tax, or securities transaction tax on them.

Risks involved with Gold ETF Investments

There are certain risks, though minor, involved with Gold ETF. Here are two important points that you must know:

  • Price fluctuations:

Like other equity products, Net Asset Value (NAV) for the units issued under gold ETF can also rise or fall according to the fluctuations in the gold price.

  • No SIP facility:

Systematic Investment Plan (SIP) facility or automated investments is a popular way to invest in mutual funds. However, this facility is not available for gold ETFs. This means that if you want to invest in Gold ETF every month, you need to make fresh investments every month.  

The bottom line:

As compared to the purchase of physical gold, ETFs offer a guarantee of around 99.5% of purity without any storage or maintenance hazards. Experts also suggest that adding gold ETF helps to diversify your portfolio. Depending on the risk appetite, liquidity, and outlook on the gold price, you can start investing around 5% to 10% of your money on gold ETF.

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