We all know the power of technology and how it has positively impacted our lives. As far as investors are concerned, technology has given them speed, convenience, and flexibility to build their portfolios. And thanks to technology, investors can also buy and sell gold online. They can trade Gold Exchange-Traded Funds (ETFs) with a minimum starting amount and slowly add the yellow metal to their portfolios. But what are Gold ETFs?
What are Gold ETFs?
Gold ETFs are open-ended mutual fund units listed and traded on the National Stock Exchange of India (NSE) and/or Bombay Stock Exchange Ltd (BSE). They are passive investment instruments that track the domestic price of gold and can be bought and sold directly like any other stock. Gold ETFs are units representing physical gold in dematerialised form.
While Gold ETFs are in electronic form, they are backed by physical gold of 99.5% purity.
How to redeem Gold ETFs for physical gold?
Gold ETFs can be purchased or sold on exchanges or subscribed or redeemed directly with an AMC in creation unit sizes. Creation unit size is the minimum units of Gold ETF which an investor can transact with a fund house. Generally, it is equivalent to 1 kg of gold.
One unit of Gold ETF may be equivalent to 0.01, 0.1 or 1 gram of gold and so on, which may vary from AMC to AMC. For instance, if one unit of a Gold ETF is equivalent to 1 gram of gold, the creation unit size is 1,000 units. So, if the creation unit size of your fund is 1,000 units, you can buy or sell in multiples of 1,000. Every fund house has a different creation unit size.
Once you have asserted the minimum Gold ETF units (in creation unit size) to be redeemed, you will have to request the fund house for the redemption process and simultaneously inform your depository participant (DP) to transfer the required number of units to the DP account of the fund house. After confirming your details, the DP will transfer the Gold ETF units to the fund house’s account. You would need to pay the differential of the gold value and units of Gold ETF to the fund house. The fund house then issues a delivery order to the investor and the custodian. You must carry your original documents and show them to the custodian during the physical delivery of gold.
Why should you invest in Gold ETFs?
Investing in Gold ETFs carries many advantages, such as:
• Liquidity and Ease of Investment
Since Gold ETFs are traded on exchanges, you can buy and sell units whenever you want during the trading hours. Also, there is no entry or exit load when you buy or sell Gold ETFs.
• No Theft or Storage Hassle
Storing physical gold can be cumbersome, costly and stressful, while Gold ETFs are stored in your Demat account. There is no fear of theft here, and you can enjoy relaxed, stress-free investments.
• Offer Hedge against Risks
Gold’s performance is often inversely related to equity markets. As a result, investing in Gold ETFs can be good for hedging risks. Gold is also considered a safe asset and has been delivering returns when other asset classes such as equities have failed to perform, thus helping in portfolio diversification. Gold ETFs also act as a hedge against inflation.
Wrapping up
Gold ETFs can be a helpful addition to your portfolio. They offer diversification, hedge against risk and inflation, liquidity and allow you to invest in gold of 99.5% purity.
Please note w.e.f May 1, 2023, the execution value for large investors must be greater than Rs.25 crores (except for Schemes managed by Employee Provident Fund Organisation (EPFO), India and Recognized Provident Funds, Approved Gratuity Funds and Approved Superannuation Funds under Income Tax Act, 1961) for creation/ redemption through the AMC.
Disclaimer:
The information herein is meant only for general reading purposes and the views being expressed only constitute opinions and therefore cannot be considered as guidelines, recommendations or as a professional guide for the readers. The document has been prepared on the basis of publicly available information, internally developed data and other sources believed to be reliable. The sponsor, the Investment Manager, the Trustee or any of their directors, employees, associates or representatives (“entities & their associates”) do not assume any responsibility for, or warrant the accuracy, completeness, adequacy and reliability of such information. Recipients of this information are advised to rely on their own analysis, interpretations & investigations. Readers are also advised to seek independent professional advice in order to arrive at an informed investment decision. Entities & their affiliates including persons involved in the preparation or issuance of this material shall not be liable in any way for any direct, indirect, special, incidental, consequential, punitive or exemplary damages, including on account of lost profits arising from the information contained in this material. Recipient alone shall be fully responsible for any decision taken on the basis of this document.
Mutual Fund investments are subject to market risks, read all scheme related documents carefully.
