Gold Exchange-Traded Fund s: Who should invest in this investment avenue?

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Are you curious about what is a gold ETF? A gold ETF (exchange-traded fund) is a financial instrument that offers retail investors an opportunity to invest in gold with zero need to hold this metal physically. These funds are traded on stock exchanges, like stocks, which makes them liquid and a convenient investment option. Investors can simply sell or buy gold ETF units via a Demat account, avoiding the stress associated with the safety and storage of physical gold. Unlike physical gold, which comes with purity concerns and making charges, gold ETFs involve lower costs as they track the gold price and are backed by high-purity gold. The pricing of gold ETF in India is transparent, reflecting the real-time price of gold in the market. This ensures retail investors get a fair price at the time of selling or buying their ETF units. In addition to these advantages, it is crucial for you as a retail investor to understand the finer details of gold ETF investment before considering this product.

Gold ETF vs. gold mutual fund

Characteristic Gold ETFs Gold mutual funds
Management style Managed passively that simply track the gold price Might involve active management, which includes investing in a mix of gold ETFs, gold mining enterprises and other related assets
Expense ratio One of the types of ETF known for a lower expense ratio Comparatively higher expense ratio
Investment objective Capitalising on the gold price Provide diversification benefits by investing in distinct kinds of gold-related assets, diluting the direct impact of gold price movement
Returns and risk More closely tied to the fluctuations in gold prices Relatively stable returns owing to diversification but at a potentially higher risk due to the involvement of other assets

Gold ETF vs. gold bond

Characteristics Gold ETFs Gold bond
Return on investment Dependent on the price movement of gold for returns Might provide a fixed interest rate in addition to capital gains
Holding period Can be sold at any time, no holding period Generally, a longer period of maturity
Safety and guarantee Do not carry government assurance Issued by the government and hence are considered safer

Major consideration before making gold ETF investments

Before considering gold ETF investments, retail investors must be aware of these factors –

Market risks

The price of gold ETFs is subject to fluctuations in the market, which can be impacted by global economic factors, currency exchange rates and changes in gold demand.

Gold ETF taxation

As per the new taxation rule in effect from 1st April 2023, gold ETFs bought on or post this date are considered short-term capital assets regardless of their holding period. Any gain on the sale of such types of ETFs is taxable at the applicable income tax slab, which can affect the net returns.

Expense ratios and costs

While usually lower than those of mutual funds, gold ETFs’ expense ratio can still impact overall returns and must be considered.

Liquidity and trade volumes

While gold ETFs are liquid, trading volumes can differ, which may affect the ease of entering and exiting positions at desired prices.

Who should invest in gold ETFs?

Gold ETF investing is especially suited for –

Investors looking for diversification

Those looking to diversify their investment portfolio by including gold ETFs alongside equities and bonds might consider this a prudent option.

Market-savvy investors

Those who are comfortable with stock market operations and desire straightforward means of investing in gold.

Strategic investors

Those who view gold as a hedge against currency fluctuations and inflation.

Risk averse investors

Those looking for a safer investment route during times of economic uncertainty may find gold ETFs attractive owing to their stability and historical value retention features.

Ending note

Investing in gold ETFs provides an efficient, secure, and modern way to include gold in your portfolio. With benefits such as transparency, ease of trading and lower expense costs, gold ETFs are a great alternative to conventional forms of gold investments. They complement an investment strategy that includes equities, offering a balanced approach to asset allocation. As always, you must consider your life goals, risk appetite level and investment time frame before making any investment decision.

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