Gold ETFs happen to be a cost-effective route of investment as they carry very lesser amount of cost in terms of expense ratio. Other cost includes can be brokerage and Demat account charges. Being traded at the exchange Gold ETFs offer the flexibility of buying and selling at the current price on the exchange
How to Invest in the Best Gold Funds & ETFs?
Indian people’s love for gold is known for centuries. This unique yellow metal not only has high perceived value but also has a strong emotional connect. It is something that defines the closeness of relationships in India.
For long, it has been the most popular investment products. While gold in the form of jewelry, gold coins or bars often comes at a huge price owing to its making charges. The yellow metal on paper through Gold Exchange Traded Funds or Gold ETFs comes at a price closer to the current gold rate. Thus, they are less expensive than physical gold.
So if you are looking for long-term investments, nothing can be better than ETFs. They can be purchased and traded only on the cash market of National Stock exchange, just like any company stock. The country’s first-ever Gold ETF trading (Gold BeES) was started in 2007.
Trading gold in physical form supports Gold ETFs as security, which means if you are buying a Gold ETF, you are purchasing gold at the back-end. This gives a guarantee to the investors about the purity of gold.
For instance, registered on NSE, Gold BeES, closely follow the latest market cost of gold, called spot prices. The NSE then assigns an ‘Authorized Participant or Member’ to handle the purchase and sale of gold to generate ETFs. These are generally large companies, like Axis Mutual Fund, Birla Sun Life Mutual Fund, HDFC Mutual Fund, ICICI Mutual Fund among others.
Benefits of Investing in Gold ETFs
Gold is considered to be one of the safest investments because it acts as a protective shield against currency fluctuation and inflation. Here are some of the benefits that you can derive by investing in Gold ETFs.
Easy trading – To begin with, you just need to buy a minimum of 1 unit of gold, which is equal to 1 gram of gold, for trading in gold ETFs. You can buy and sell it with the help of a stockbroker or fund manager.
Open trading - Everyone can keep track of gold prices on the stock exchange since they are public. You can easily check the gold prices for the day or the hour without any hassle. Gold prices vary from karat to karat and keep fluctuating daily. For example, the current gold rate in Delhi ranges between Rs 33,000 and 35,000 for 24 karats, and 22 carats hallmarked gold rate accordingly.
Simple transactions - You can trade your gold ETFs at any time of the day when the stock exchange is open.
Economical - Since gold ETFs listed on the stock exchange have no entry or exit charges, you are just required to pay nominal brokerage fees.
Safe asset - Gold prices don’t fluctuate very much. So even if your returns on equities go down, gold ETFs can protect you from huge losses.
Collateral security - Your gold ETFs can also work as collateral security if you plan to take a loan.
Gold ETF Charges
Gold ETF has certain costs associated with it. First is the expense ratio (for managing the fund), which is around 1%, much less than other mutual funds. The second one is the broker charges that need to be reported for whenever you conduct the purchase or sell the units of Gold ETF. The third one is the tracking error, though it is not considered as charge but has a crucial effect on the returns.
Selecting the Right Gold ETF
The market has as many as twelve Gold ETFs. The performance of these funds would mostly depend on the fluctuation in prices of physical gold. You need to keep an eye on tracking errors as well as the trading volumes. Choose funds that have lower tracking error and higher trading volume. If you wish to buy or sell any ETF Unit, you can do that during trading hours of the stock market, which is 9.15 hrs to 15.30 hrs.
Taxation
Gold ETFs are also considered to be a tax-friendly investment because the money you earn from them gives you capital gains. If the units purchased are held for less than 36 months, they are added to the investor's income and is taxed accordingly. However, 20 percent tax has to be paid on long term capital gains on units held for more than 36 months.
7 tips on investing in gold ETFs
Currently, the gold market is bullish and this is a good time to invest in ETFs because you stand to make profits as the prices rise steadily every day.
Let us give you some tips that you could use if you plan to invest in gold ETFs:
Gold ETFs are more profitable than other gold-based investments if you plan to invest large sums, or indulge in regular trade.
Since gold ETFs come with brokerage or commission charges of 0.5 to 1 percent, shop around the ETF market a bit to find a stockbroker/fund manager whose charges are low.
Do not choose a gold ETF product or fund manager based on low fees alone. Look at the fund’s performance over the last few years to get a clear idea of how well the fund managers handle the accounts.
Keep an eye on the gold price trends before you start transacting. Just like with stocks, you may want to buy gold ETFs at low prices and sell them as prices go up.
If your gold ETF is managed by a fund manager, keep an eye on your account and the trades being done for you. Regular monitoring can help you improve the performance of your portfolio.
Gold is better as a short to medium-term investment, as long-term returns on the yellow metal are often as low as 10 percent per annum.
Do not make too heavy or long-term investments in gold. Allotting 5 percent to 10 percent of your investment portfolio to gold ETFs is a wise idea. This will also help keep your portfolio robust and the returns stable.
