Indian people’s love for gold is known for centuries. This unique yellow metal not only has high perceived value but also has a strong emotional connect. It is something that defines the closeness of relationships in India.  

For long, it has been the most popular investment products. While gold in the form of jewelry, gold coins or bars often comes at a huge price owing to its making charges. The yellow metal on paper through Gold Exchange Traded Funds or Gold ETFs comes at a price closer to the current gold rate. Thus, they are less expensive than physical gold.

So if you are looking for long-term investments, nothing can be better than ETFs. They can be purchased and traded only on the cash market of National Stock exchange, just like any company stock. The country’s first-ever Gold ETF trading (Gold BeES) was started in 2007.

Trading gold in physical form supports Gold ETFs as security, which means if you are buying a Gold ETF, you are purchasing gold at the back-end. This gives a guarantee to the investors about the purity of gold.   

For instance, registered on NSE, Gold BeES, closely follow the latest market cost of gold, called spot prices. The NSE then assigns an ‘Authorized Participant or Member’ to handle the purchase and sale of gold to generate ETFs. These are generally large companies, like Axis Mutual Fund, Birla Sun Life Mutual Fund, HDFC Mutual Fund, ICICI Mutual Fund among others.

Thus continuous trading and control by ‘Authorized Members’ make sure that the cost of the gold and ETFs remains the same.  

Since gold is a less volatile investment, they are considered to be the best, when it comes to beating the rising inflation in the long-term. One Gold ETF unit is equal to 1 gram gold. So, you can enjoy the dual advantage of stock trading and gold investments.

As the price of gold increases, the value of Gold ETFs increase as well, and vice versa. As a result, it doesn’t compromise on the purity and hence, is available at a uniform rate across the country.  Since ETFs are linked to direct gold prices, there is complete transparency in trading. It is a low-risk investment.

Benefits of Investing in Gold ETFs

Gold is considered to be one of the safest investments because it acts as a protective shield against currency fluctuation and inflation. Here are some of the benefits that you can derive by investing in Gold ETFs.

• Easy trading – To begin with, you just need to buy a minimum of 1 unit of gold, which is equal to 1 gram of gold, for trading in gold ETFs. You can buy and sell it with the help of a stockbroker or fund manager.
• Open trading - Everyone can keep track of gold prices on the stock exchange since they are public. You can easily check the gold prices for the day or the hour without any hassle. Gold prices vary from karat to karat and keep fluctuating daily. For example, the current gold rate in Delhi ranges between Rs 33,000 and 35,000 for 24 karats, and 22 carats hallmarked gold rate accordingly.
• Simple transactions - You can trade your gold ETFs at any time of the day when the stock exchange is open.
• Economical - Since gold ETFs listed on the stock exchange have no entry or exit charges, you are just required to pay nominal brokerage fees.
• Safe asset - Gold prices don’t fluctuate very much. So even if your returns on equities go down, gold ETFs can protect you from huge losses.
• Collateral security - Your gold ETFs can also work as collateral security if you plan to take a loan.

How to buy Gold ETF

1. First and foremost step is to open an online trading and Demat account with the help of a stockbroker.
2. Then log in to the website of the broker's online trading portal by entering your login ID and password.
3. In the third step, you have to select the Gold ETF you want to invest in. You can either purchase it in a lump sum or regularly through systematic SIPs. It also gives you the option to choose mutual funds with underlying gold ETF.
4. In the next step, place the buy order for purchasing a specific number of Gold ETF units.
5. You will get a confirmation mail on your email id or phone.
6. The web system will subsequently debit your bank account with nominal charges through a linked savings account.

You can plan to invest in Gold ETFs systematically rather than trying to do it according to the market. They are considered to be more profitable than other gold investments.

However, there are some points that you have to keep in mind before finalizing the purchase.

• Since gold ETFs have brokerage or commission charges of 0.5 to 1 percent attached to it, it is important to look around the market and find a stockbroker or fund manager who charges less.
• Don’t forget to keep a tab on the gold price before trading in Gold ETF. You may wish to purchase gold ETFs at lower rates and sell them later as the prices increases.

Gold ETF Charges

Gold ETF has certain costs associated with it. First is the expense ratio (for managing the fund), which is around 1%, much less than other mutual funds. The second one is the broker charges that need to be reported for whenever you conduct the purchase or sell the units of Gold ETF. The third one is the tracking error, though it is not considered as charge but has a crucial effect on the returns.

Selecting the Right Gold ETF

The market has as many as twelve Gold ETFs. The performance of these funds would mostly depend on the fluctuation in prices of physical gold. You need to keep an eye on tracking errors as well as the trading volumes. Choose funds that have lower tracking error and higher trading volume. If you wish to buy or sell any ETF Unit, you can do that during trading hours of the stock market, which is 9.15 hrs to 15.30 hrs.

Taxation

Gold ETFs are also considered to be a tax-friendly investment because the money you earn from them gives you capital gains. If the units purchased are held for less than 36 months, they are added to the investor's income and is taxed accordingly. However, 20 percent tax has to be paid on long term capital gains on units held for more than 36 months.

What Should you do?

If you wish to fulfill your long term goals, you should not hold more than 10 percent gold in your Gold ETF portfolio. If the prices fall, you can allocate more to the asset, or you can sell it off when allocation towards gold in your portfolio goes higher.

Just like the stock market, you have to be extra cautious while investing in Gold Exchange Traded Funds. Haste buying and selling can lead to heavy losses that can hurt your investment portfolio. It is better to use gold ETFs as assets and hedge investments rather a daily profit-trading tool.