What are GOLD ETFs? When should you buy them?

For centuries gold has proven to be a safe investment bet. Indians, when compared to people in the rest of the world, have felt great comfort when investing in this yellow metal. Often, this investment is in the form of jewelry and not other digital forms like Gold ETFs or Bonds. Although, investment in physical gold has created other challenges for us. As India does not produce gold in significant quantities, we have begun to rely on imports.

People began to accumulate Gold for safety purposes as their Long-term investment strategy. Some professionals today say that Gold is a great tool to hedge against inflation. Large scale gold imports, especially for investment created a higher Trade Deficit (this happens when imports far exceed exports). When this happens the rupee comes under pressure and tends to weaken. This sets off many more problems for the Indian economy.

To avoid this situation and push people to look beyond investing in just Physical Gold, the Government of India came out with Gold Exchange Traded Funds (ETFs) apart from Sovereign Gold Bonds (SGB).

Now….What is a Gold ETF?

A Gold ETF is an exchange-traded fund that aims to track the domestic price of physical gold. In other words, Gold ETFs are units representing physical gold either on paper or in dematerialised forms. Typically, one Gold ETF is equal to 1 gram of gold. Meaning, 1 unit of Gold ETF is backed by an equivalent quantity of physical gold. Gold ETFs give you a combined benefit of investing in Stocks as well as Gold.

They are listed and traded on the National Stock Exchange of India (NSE) and Bombay Stock Exchange Ltd. (BSE). And just like the stock of any company that can be bought & sold continuously at market prices, Gold ETFs can be treated the same way.

However, when you actually sell your Gold ETF, you don’t get physical gold, but receive the cash equivalent of the market price.

How are Gold ETFs Beneficial to you?

• Transparency – The biggest benefit is the transparency in pricing as it is directly linked to the price of gold. 
• Cost – ETFs incur far lower expenses compared to physical gold where one ends up paying wastage charges, making charges, safe storage cost etc. 
• Safety – Unlike physical gold the investor need not worry about the investment’s safety. ETFs not only fetch the same return as physical gold but are also a lot safer than its physical form as there is no fear of theft or depreciation.
• Loan – Gold ETFs can be placed as a collateral to secure loan from any financial institution.

Where can you purchase Gold ETFs?

Gold ETFs can be purchased through a stock broker like Zerodha, Sharekhan and other investment apps. You will have to pay a small brokerage or fund management charges while buying or selling Gold ETFs. As  mentioned earlier the overall cost is much lower than what an investor incurs in buying physical gold and there is NO better time to invest in Gold than today.

Gold ETFs Vs. SGB

Many of you might have a pondering question on how Gold ETFs are different from SGBs. Well here’s our take of the same. 

The advantage that ETFs have over SGB is that they are more liquid. They can be sold at any given time like stocks. An investor need not hold onto their investment for a fixed period. Although ETFs are taxable.

If you prioritize your investments based on safety and liquidity, then Gold ETFs are your safe haven.