Hesitant to buy physical gold? Hold it in an ETF

With festival season around the corner, it is not just the jewellers who are encouraging customers to buy gold during this time. Stock-broking companies, too, are offering special discounts and offers for those buying and trading in gold. For those who are not interested in buying gold in the physical form, gold exchange-traded funds (ETFs) are attractive options. Here is more on what you need to know about gold ETFs.

How it works: Gold ETFs are like mutual funds that track a specific sector or commodities. Gold ETFs track the prices of gold and the value of the funds is dependent on the price movement of gold. Each gold ETF unit is almost equal to 1 gm of gold. These units are traded on the exchanges like stocks of companies. Gold ETFs can be purchased and traded online.

What are the gold ETFs available in India for investment? There are about 11 gold ETFs traded on the stock markets in India. Gold BeES or the Goldman Sachs Gold Exchange Traded Scheme is the largest traded gold ETF in India. There are other popular ETFs also, like Reliance Gold ETF, Kotak Gold ETF and SBI Gold ETS. One should have a demat account to invest in gold ETFs.

How different are they from each other? Despite all gold ETFs benchmarking their performance to the price of gold in the domestic commodity exchanges or the bullion market, the prices of the ETFs are quite different from each other.

“The difference is due to the difference in asset allocation. Some ETFs invest 95 per cent of assets in gold, while few others invest up to 99 per cent. So based on the gold price movement, the trading price of the ETFs also differ,” says B Sarath Sarma, ED, IDBI Asset Management.

Advantages of investing in gold ETFs: For those wanting to benefit from the gold price rally but are still hesitant to buy it in the physical form, then gold ETFs would be the best option. Since gold is only in the virtual form here, the investor need not worry about security or safekeeping of the metal. Also, gold in the form of coins or jewellery carry a lot of allied costs like making charges and wastage among others, which one can avoid by investing in ETFs.

Like taking a loan against physical gold, one can also take a loan against gold ETFs. Companies like Muthoot Finance offer loans at a rate of around 18 per cent, for around 85 per cent of the NAV of the ETFs.

Disadvantages of investing in gold ETFs: If investing in gold is the goal, then only the long-term investor who is willing to stay invested for a year or more, should invest in gold ETFs, considering the fluctuation in prices of the yellow metal seen in the past few months.

There may not be additional costs in the form of wastage or making charge, like in gold coins and jewels, but gold ETFs carry a fund management charge of a minimum of 1 per cent, just like any other MF product.

“We are living in troubled times and in times like these, gold is a safe haven. The best way to approach gold as an investment vehicle is through systematic investment plans (SIPs),” says Nirav Panchmatia of AUM Financial Advisors.

Financial planners advise against investing a lumpsum in gold now, either in the physical form or through ETFs, because the uncertainly over various global issues, which affect gold prices, still exists.


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