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10 things you must know about Gold ETFs

It is no secret that Indians love gold. During festival and wedding times, it is common to <>see jewellery shops thronged with eager buyers. However, in modern times, financial experts advise investors to invest in gold digitally via gold exchange-traded funds, also called Gold ETFs.

Here are 10 things that you need to know about Gold ETFs

1. What they are:

Gold ETFs are open-ended mutual funds that invest in physical gold. They are traded on the stock exchange just like any other stock. When the gold ETF is traded on the exchange, they are credited with the unit’s equivalent in cash. Each unit of Gold ETF represents grams of 99.5% of pure, high-quality gold ranging from 0.01 gram of physical gold to 1 gram of physical gold.

2.How to buy and the minimum investment amount?:

Since gold ETFs are traded on the stock exchange(s), they are purchased using a Trading account and Demat account. The minimum investment in gold ETFs is the prevailing cash amount approximately equal to 0.01 gram of physical gold to 1 gram of physical gold.

3. Flexibility and liquidity:

You can purchase units of gold ETFs online, which are then credited to your Demat account. Since the demand for gold is generally high, it can easily be traded on the stock exchange.

4. Easy transactions:

The trade of gold ETFs is done on the stock exchange during market hours. The price of the ETFs is publicly available on the stock exchange, which is similar to the pricing of physical gold with respect to the per gram value. This makes the transaction transparent and eases investing in Gold ETF units.

5. Additional expenses and taxability

Gold ETFs have no entry or exit loads. The only cost that you have to pay is the brokerage on transactions. Nowadays, with discount brokers available as an option for investment, Gold ETF units can be bought without paying brokerage. Also, since Gold ETFs have their underlying investment in Gold Bars, they do not have any making charges. The indirect taxes levied on Gold ETFs are the same as those on the sale or purchase of physical gold. When unitholders make a profit on the redemption of gold ETF units, they will have to pay capital gains tax. In Gold ETFs, taxes are applicable on both long- and short-term capital gain. Long-term capital gains tax is taxed at 20% after indexation on gold ETF investments held for more than 36 months. For investment held up to 36 months shall be treated as short-term capital gain, the capital gains tax will be levied as per applicable tax slab of unitholders. As opposed to buying or investing in other forms of gold, gold ETFs do not attract wealth tax, GST, or security transaction tax. Kindly consult your financial advisor before making any investment.

6. Security:

Unlike physical gold, you do not have to worry about their gold ETFs being stolen. Furthermore, you do not have to think about where to store them or pay the additional costs like a bank locker.

7. Hedge against inflation and low market risk:

Gold is a well-known asset that works well during times of market volatility. Hence, gold ETFs act as a hedge against inflation and currency depreciation. It should be noted that gold prices are subject to market risks, which again impact gold ETF prices.

8. Portfolio diversification:

Experts advise that some allocation of gold ETFs should be made in your investment portfolio. Due to the stable nature of gold prices, gold ETF investments help reduce risk during volatile market conditions.

9. Acts as collateral:

You can use your gold ETF investments as collateral against a secured loan from a bank or non-banking financial company. As it is in electronic form with clear pricing and so on, it has the advantage of being more convenient than traditional hypothecation.

10. Systematic Investment Plan (SIP) in Gold:

Since Gold ETFs are purchased via Demat accounts, they do not traditionally entertain SIPs. However, some brokers do offer stock SIP facility. If you wish to invest systematically in a periodic manner in gold through a Mutual Fund, Gold Fund of Funds (FoFs) can act as a good choice. Gold FoFs invest in Gold ETF. In case of Gold FoFs, investors will be bearing additional recurring expenses of its underlying scheme, i.e. Gold ETF.

Summing up

Gold ETFs can be a good investment option for a conservative investor. It is a low-risk investment and some portfolio allocation towards gold can help in mitigating the inflation effect over the long term.

Mutual Fund Investments are subject to market risks, read all the scheme related documents carefully

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, affiliates or representatives (“entities & their affiliates”) 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


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