5 Things to Know before Investing in Gold ETFs
The Gold ETF market in India is only ten years. Gold ETF as an investment option has been experiencing considerable growth. That is due to the traditionally high demand for gold in Indian households combined with the global uncertainty caused by the Covid-19 pandemic and geopolitical tensions between Russia and U.S. post-2020 presidential election. However, its market shares are considerably low, albeit growing, putting it in uncertain infancy. It is, therefore, necessary for investors to consider all options before making any investments. The points elucidated below are intended to help investors do just that, each information on one important factor one must consider before making any investment.
Five things to know before investing in gold ETFs
- One of the first things to consider before buying gold ETFs is the past performance record of the fund house. Better performance indicates the likelihood of better future performance and general overall efficiency.
- Liquidity, i.e., the actual trading activity on a gold ETF, is an important indicator to consider. Liquidity is higher when the actual trading activity is high, which gives a better chance of high returns.
- The tracking error of the ETF is another essential factor to consider. ETFs are expected to track their underlying indexes closely. It is generally recommended that investors opt for a gold ETF with the lowest tracking error possible.
- Investors must understand the taxes applicable to gold ETFs before investing in them. You pay capital gains on Gold ETFs upon redemption for up to 3 years since they are considered non-equity assets. Long term capital gains are also subject to 20% taxes after indexation benefits have been considered. Since
- Gold ETFs are non-equity assets. They are not subject to the Securities Transaction Tax (STT).
- Gold ETFs are not equity assets that generate revenue over time. Instead, they are hedges meant to protect your portfolio during times of economic uncertainty. That also means that Gold ETFs also perform best during times of economic uncertainty.
Additional points to consider before investing in gold ETFs
While the above 5 points are crucial, they are by no means the only points to consider. Given below are some additional information to keep in mind while considering investments in gold ETFs:
- Buying or selling of gold ETFs does not affect the fund's assets under management (AUM). There is only the transfer of ownership in a gold ETF transaction, while the AUM remains the same.
- SEBI regulates gold ETFs, and each unit of gold ETF is backed by a physical unit of gold of equivalent value. Most gold funds choose to keep their physical gold in custody with the Bank of Nova Scotia, also known as Scotiabank, branches in Mumbai and Delhi.
- Gold ETF prices are affected solely by the price of physical gold, with the ETFs increasing or decreasing in value depending upon the market value of gold at any given time.
- Gold ETFs can be bought and sold on the stock market using a demat account, just like any other asset traded on the stock market.
Additional read: Mutual funds vs ETFs: Know the difference
Gold ETFs represent a good option for investors looking to invest in order to hedge their portfolios in these uncertain times. Investors who carefully consider every aspect of investing in gold ETFs, and who do the requisite research will generally benefit from investments in gold ETFs.
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