What is Gold ETF

Aneesh planned to make his first spending in a small yet safe investment option. His Parents advised gold investment, considering it an auspicious and secure thing for the beginning of something good. But Aneesh was worried about the amount needed to buy gold. Also, the maintenance or the risk of mishandling or theft was a problematic factor. Gold is indeed pious but is there a safer way to invest in it even with a small amount of money? Yes, Gold ETFs. What is a Gold ETF, and how does it work? Let's understand.

What is Gold ETF?

An exchange-traded fund (ETF) that tracks the domestic physical gold price is a Gold ETF. They are gold-based passive investment instruments that invest in gold bullion and are based on gold prices. In a nutshell, Gold ETFs are paper or dematerialized units that represent physical gold. One gramme of gold equals one Gold ETF unit backed by physical gold of extremely high purity. Thus, gold exchange-traded funds (ETFs) combine the flexibility of stock investing with the simplicity of gold investing. Like any other stock, Gold ETFs are listed and traded on the NSE (National Stock Exchange of India) and the BSE (Bombay Stock Exchange Ltd.).

How does Gold ETF work?

A gramme of gold is represented by each unit of a Gold ETF, which is 99.5% pure. This physical gold is kept in custodian banks' vaults and is underlying for the units' value. Consider the following scenario: if the fund manager decides to assign each unit the value of one gramme of gold, the price of each unit will be roughly the same as the price of one gramme of gold. Consumers can trade Gold ETFs through a variety of investment funds.

Additional read: ICICI Direct- Gold ETF vs Gold futures

Advantages of investing in Gold ETF:

• Gold ETF is traded at the same rate pan India, which is not the case with physical gold. In different geographical locations, the physical gold market operates at different prices. In addition, the buying and selling rates are different to cover the liquidation and other costs associated with physical gold trading.
• The purity of Gold ETFs is guaranteed because the sector is organized, and 99.5% purity is the standard. In contrast, the physical gold market lacks the transparency needed to build trust in purity.
• In the case of Gold ETF, you can buy and sell gold with ease due to it being listed on stock exchanges.
• Because you're dealing with a Dematerialized form of gold, there's no need to worry about storage when you invest in Gold ETFs. If you buy gold coins, bars, or jewellery, storage and security are significant concerns.
• Gold ETF is stored in electronic and Demat form. That relieves the investor of the worries that come with the storage of physical gold, like theft. It also saves your money on locker fees that are to be paid to keep physical gold safe.
• Since Gold ETFs are traded on a stock exchange, there are no entry or exit loads.
• Physical gold is subject to indirect taxes, such as the 3% GST on the purchase and sale price. ETF transactions save this cost because ETFs are securities, and securities are specifically exempt from GST.

How can I invest in Gold ETF?

Several banks and private financial institutions offer Gold ETF products. Once you've decided on a product, your ETF fund manager will act as your stockbroker on the NSE, buying and selling gold on your behalf. This procedure is similar to stock and stock market trading. To invest in Gold ETF follow these steps-

• Open a Demat account; most platforms for eg our stock market app allow you to open a Demat and trading account online 
• Some essential documentation, such as a PAN card and proof of address and identity, will be required as a part of the KYC procedure. 
• After you've created an account, you can choose to purchase units of a Gold ETF
• Your Demat account will be credited with the gold ETF units
• You will get the cash equivalent of the value of gold on the day of selling if you redeem your ETF

Experts believe that adding a component of Gold ETF to your investment portfolio will protect your portfolio from downside risks. Depending on your risk appetite and available cash in hand, you could put 5 to 10% of your money into gold. The crucial thing is to have a well-diversified portfolio, and investing in gold can be an excellent way to do so.

Gold ETF FAQs

Is Gold ETF a good investment?

Gold ETFs can be a good fit if you want to diversify your portfolio or hedge against inflation. They're easy to buy and sell like stocks, but unlike physical gold, you avoid storage hassles. However, research market trends before investing.

Is Gold ETFs backed by physical gold?

Yes, some Gold ETFs are backed by physical gold bars stored securely in vaults. Each ETF share represents a portion of that gold. This means the ETF's price tracks the price of gold itself. Be sure to check details of the specific ETF you're considering.

Is Gold ETF safe?

Gold ETFs themselves are considered safe investments. They trade on stock exchanges and are regulated. However, the value of the ETF fluctuates with the gold price, so there's always market risk. You don't have to worry about theft like with physical gold.

Why gold ETF prices are different?

Small differences in Gold ETF prices can occur due to expense ratios and underlying gold amounts per share. Some ETFs hold a half gram, while others hold a full gram, affecting the price per unit.

What are the disadvantages of gold ETF?

While convenient, Gold ETFs don't offer physical gold possession or any interest earned. You also face fees and taxes, and their value depends on the gold market.