Gold ETF: Investment Benefits, Price & Disadvantages (2024)

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Gold Exchange Traded Fund or gold ETF has been gaining popularity in recent years as investors look for alternative investment options to diversify their portfolios. In this blog post, we will discuss what Gold ETFs are, their advantages and disadvantages, the different types of Gold ETFs, and reasons why you should consider investing in them.

What is Gold ETF?

An ETF is a type of investment fund that is traded on stock exchanges, just like individual stocks. Gold ETFs are a specific type of ETF that invests in gold. It is, in fact, one of the best ways to invest in gold. They provide investors with exposure to gold by investing in derivatives without having to physically hold the metal.

List of the Best Gold ETFs to Invest in India

Here is an educational list of the 10 best gold ETFs for investment in the Indian Stock Market:

Disclaimer: Please note that the above list is for educational purposes only, and is not recommendatory. Please do your own research or consult your financial advisor before investing.

How do Gold ETFs Work?

Gold ETFs tie their value to the price of gold by holding physical gold or investing in gold derivatives. As the price of gold changes, so does the value of the ETF. Investors can buy and sell shares of the ETF on the stock exchange, just like a stock.

Gold ETFs can be either physical or synthetic. Physical Gold ETFs hold physical gold bullion as the underlying asset, while Synthetic Gold ETFs use derivatives to track the physical gold price. Gold ETFs trade on stock exchanges just like stocks, with the Gold ETF share price reflecting the price of gold.

Features of Gold ETFs

Here are a few key features of Gold ETFs to Invest in India:

• Clarity Unveiled: Similar to stocks, gold ETF prices are accessible to the public on the stock exchange. Stay informed about your portfolio’s value by monitoring daily or hourly e gold prices.
• Seamless Trading: Begin trading with a minimum of 1 unit, equivalent to 1 gram of gold. Enjoy the flexibility of buying and selling units through your stock broker or ETF gold fund manager daily or even hourly, echoing the dynamics of equities trading.
• Cost-Efficient Routes: Investing in a listed gold ETF incurs no entry or exit load. Experience cost-effectiveness with low brokerage charges ranging from 0.5 to 1 percent, making it a financially sound choice for investors.
• Mitigating Risks: Gold ETFs act as a safeguard with lower price fluctuations compared to equities. In times of declining equity returns, consider gold ETFs as a shield against substantial losses.
• Tax Advantages: While long-term capital gains tax applies after one year, gold ETFs exempt you from VAT, Wealth Tax, and Securities Transaction Tax. Incorporate these tax benefits into your investment strategy when exploring gold ETFs.

What are the Advantages and Disadvantages of Gold ETFs?

Advantages of investing in gold ETFs

Here are a few benefits of investing in gold ETFs:

• Gold ETFs offer an easy way to invest in gold without owning physical gold.
• Investors can easily buy and sell Gold exchange traded funds on the stock exchange, making them more liquid than physical gold.
• Gold ETFs in India provide portfolio diversification and can be used as a hedge against inflation.
• Gold ETFs offer lower costs compared to other gold investment options.

Disadvantages of investing in gold ETFs

Here are a few gold investment disadvantages:

• Physical gold provides a higher level of security than Gold ETFs, as it eliminates counterparty risk.
• Gold ETFs may not perform as well as physical gold during times of economic uncertainty or geopolitical instability.

What are the Types of Gold ETFs?

1. Physical Gold ETFs

Physical Gold ETFs hold actual gold bullion as their underlying asset. The ETF is backed by physical gold held in a vault, and the shares of the ETF represent a portion of the gold held. This way, you don’t need to engage in the dilemma of choosing between gold etf vs physical gold.

Benefits of Physical Gold ETFs

• Physical Gold ETFs offer a high level of security as they hold actual gold bullion.
• Physical Gold ETFs offer a simple way to buy physical gold without having to store it yourself.
• Physical Gold ETFs are a cost-effective way to invest in physical gold.

Risks of Physical Gold ETFs

• There is a risk of loss due to theft or damage to the gold held in the vault.
• Physical Gold ETFs have a counterparty risk as they rely on a custodian to store the gold.

2. Synthetic Gold ETFs

Synthetic Gold ETFs invest in gold derivatives, such as futures and options, instead of physical gold bullion. The ETF tracks the price of gold through these derivatives.

Benefits of Synthetic Gold ETFs

• Synthetic Gold ETFs offer more flexibility than Physical Gold ETFs, as they can invest in a wider range of gold derivatives.
• Synthetic Gold ETFs are less expensive than Physical Gold ETFs, as they do not have to store actual gold bullion.

Risks of Synthetic Gold ETFs

• Synthetic Gold ETF in India have counterparty risk as they rely on the issuer to deliver on the gold derivative contracts.
• Synthetic Gold ETFs may not track the price of gold as closely as Physical Gold ETFs.

Why Invest in Gold ETFs?

1. Portfolio Diversification: Gold ETFs are a great way to diversify your investment portfolio as they offer exposure to the price of gold, which has a low correlation with other asset classes. By adding gold ETFs to your portfolio, you can reduce the risk of your portfolio and achieve more stable returns.
2. Hedging Against Inflation: Gold is often considered a hedge against inflation as its price tends to rise during inflationary periods. Investing in gold ETFs can help protect your investments from the negative effects of inflation.
3. Gold is a Safe-Haven Asset: Gold is a safe-haven asset that investors flock to during times of economic uncertainty. As a result, investing in gold ETFs can provide a cushion against market volatility and offer a sense of security to investors.
4. Gold ETFs are Liquid Assets: Gold ETFs are highly liquid assets that can be bought and sold easily through a broker. This makes it easy for investors to buy and sell gold ETFs whenever they want without having to worry about the logistics of owning physical gold.

How to Invest in Gold ETFs?

The following are the ways on how to buy gold ETFs:

1. Choosing the Right Gold ETF: There are several gold ETFs available in the market, including Gold Bees and ETF Gold BeES, among others. When choosing a gold ETF, investors should consider the expense ratio, liquidity, and tracking error of the fund. It is essential to do thorough research before investing in any gold ETF.

2. Buying Gold ETFs: Investors can buy gold ETFs through a brokerage account. Investors should ensure that their brokerage account is authorized to trade in ETFs. To buy gold ETFs, investors need to place an order with their broker, and the gold shares will be added to their brokerage account.

Investing in gold ETFs via smallcase

You can also invest in a basket consisting of gold ETFs via smallcase. Simply go to smallcase.com or the smallcase app, and login via your phone number. Then, go to ‘Discover‘ and enter ‘gold etf‘ in the search bar and hit enter. You’ll find an array of stock portfolios that have gold ETFs as a constituent. You can filter the choices based on minimum investment amount, volatility, or the theme of the smallcase. Just pick the one that fits your investment criterion.

Make sure that you do your diligent research before picking the right stock, keeping in mind your long-term investment goals and risk appetite.

Equity & Gold smallcase by Windmill Capital

Make sure that you do your diligent research before picking the right stock, keeping in mind your long-term investment goals and risk appetite.

Who Should Invest in Gold ETFs?

Investors seeking income through gold trading without owning the physical commodity can opt for exchange-traded funds (ETFs). These funds offer a chance to capitalize on gold’s price and performance trends. In recent years, the best gold ETFs have consistently outperformed standard stock benchmarks, making them an appealing choice for risk-averse investors.

With brokerage fees ranging from 0.5% to 1%, ETF gold investment present a cost-effective option for those looking to minimize commission charges and enhance savings.

To maintain a well-balanced investment portfolio, it is advisable to limit gold investments to 5% to 10% of the total portfolio. This approach ensures a sturdy investment strategy and a steady return on investment.

Things to Know About Gold ETFs

Here are a few things to know if you are considering investing in Gold ETFs:

• Nature and Trading: Gold ETFs, akin to open-ended mutual funds, invest in physical gold. Traded on the stock exchange like regular stocks, each unit represents grams of 99.5% pure gold.
• Acquisition and Investment: Purchased through a Trading and Demat account, the minimum investment mirrors 0.01 to 1 gram of physical gold.
• Flexibility and Liquidity: Easily bought online, gold ETF units are credited to your Demat account, providing flexibility due to the high demand for gold.
• Smooth Transactions: Transparent trading on the stock exchange during market hours mirrors physical gold pricing, simplifying the investment process.
• Costs and Tax Implications: No entry or exit loads; only brokerage fees apply. Taxes on capital gains are applicable for both short and long terms, with specific rates based on the holding period.
• Security Advantage: Unlike physical gold, gold ETFs eliminate concerns about theft or storage costs, making them a secure investment.
• Inflation Hedge and Market Resilience: Gold ETFs serve as a hedge against inflation and market volatility, offering stability during uncertain times.
• Portfolio Diversification: Experts recommend including gold ETFs in your portfolio to reduce risk during market fluctuations.
• Collateral Utility: Gold ETF investments can be used as collateral for secured loans, offering convenience compared to traditional hypothecation.
• Systematic Investment Options: While traditional SIPs are not applicable, some brokers offer a stock SIP facility. Alternatively, Gold Fund of Funds (FoFs) provide a systematic investment plan option, investing in Gold ETFs. Note: Additional expenses may apply. Consult a financial advisor before investing.

Tax Implications of Gold ETFs

Investors should be aware of the tax on gold ETFs. Gold ETF funds are taxed as capital gains, and the tax rate depends on how long an investor holds the shares. Short-term gains (investments held for less than a year) are taxed as ordinary income, while long-term gains (investments held for more than a year) are taxed at a lower rate.

Gold Mutual Funds vs Gold ETFs

Here is a comparative analysis of gold mutual funds vs gold ETFs:

To Wrap It Up…

Gold ETFs investments are a great way to add diversity to your investment portfolio, hedge against inflation, and protect your investments from market volatility. However, investors should do their research and be aware of the tax implications of investing in gold ETFs.

If you’re looking to invest in gold ETFs, it’s important to choose the right fund and have a solid understanding of the investment.

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