Gold Exchange Traded Funds (ETFs) are gold units that are issued and held in real gold with a gold custodian bank. Gold ETFs have been around in India for almost ten years, but they have yet to take off in a large way, especially given that gold prices have been in a secular slump since September 2011. When compared to the worldwide ETF sector, the Indian Gold ETF category is insignificant. The total AUM of Indian gold ETFs is less than $1 billion, whereas Spider Gold ETF alone manages nearly $35 billion AUM.
What exactly is a Gold ETF, and how does it work? Before you buy gold ETFs in India, you should understand certain fundamental concepts. Let us also look at the gold ETF investment scenario in India. Here are some things you should know about the complexities of investing in gold ETFs.
1. Gold ETFs are simply one way to invest in gold
There are numerous ways in which you can invest in gold. You have the option of purchasing physical gold in the form of bars, gold bonds issued by the RBI, e-gold issued through commodity exchanges, or even gold futures. One of the benefits of gold ETFs is that they may be held in your ordinary Demat account and bought and sold just like any other investment. In India, gold ETFs are fairly liquid.
2. Gold ETFs, like stocks, can be bought and traded on exchanges
This is a logical extension of the preceding point, and you may buy and sell gold ETFs on the regular stock exchange using your existing trading account. These Gold ETFs, like shares, will be credited or debited to your Demat account and have no lock-in limitations.
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3. Buying or selling gold ETFs has no effect on the fund’s AUM
This is where gold ETFs differ from traditional mutual funds. When you purchase units of a mutual fund scheme from the AMC, the fund’s AUM increases, and when you redeem units, the fund’s AUM decreases. In the case of ETFs, ownership is solely transferred from seller to buyer, and the ETF AUM remains unchanged.
4. Gold ETFs are backed by actual physical gold held by a gold custodian
If you have concerns about what may happen to your money, keep in mind that gold ETFs are controlled by SEBI and that each unit is backed by genuine gold. What you must be certain of is that each unit of gold ETF is backed by comparable physical gold.
5. Gold ETFs are linked to gold prices
Price risk exists in gold ETFs, just as it does in gold itself. If the price of gold rises, so will the price of the gold ETF, and vice versa. The price of actual gold is the only element that influences the price of Gold ETF.
6. A gold fund might help you diversify your equity holdings
Gold and equity have an extremely low correlation and, at times, a negative correlation. As a result, having 20% gold in your portfolio provides a buffer against the vagaries of macroeconomic risks and stock market volatility.
7. Gold ETFs perform best during periods of global turmoil
This is something you will see again and again. In times of economic and geopolitical uncertainty, gold prices tend to rise. During the 1970s, when the world was rocked by wars, the price of gold increased about 25 times. In times of high global uncertainty, gold act as a portfolio diversifier.
8. Gold ETFs, like any other asset, is subject to capital gains tax
When redeemed, gold ETFs are liable to capital gains tax. There is a little distinction here. Because gold ETFs are considered non-equity assets, their definition of short-term is three years rather than one. In addition, after accounting for the advantage of indexation, LTCG will continue to be taxed at 20%.
9. STT is not applicable to Gold ETFs
Gold ETFs are exempt from the Securities Transaction Tax (STT). This is due to the fact that STT is only applied by default on equities and equity products. STT does not apply to gold ETFs because they are explicitly defined as non-equity instruments. This increases the redemption yield on gold ETFs.
10. Gold ETFs act as a diversifier than an individual investment
This is possibly the most crucial issue that consumers should be aware of when it comes to gold ETFs. They are not investments that can generate value over time, such as equity or debt. act as a portfolio diversifier due to their long-term store of value. That is, they are intended to preserve value during times of political and economic hardship when other asset values are under pressure.
Gold ETFs are mutual funds that you should examine if you want to safeguard your wealth. Once you understand the fundamentals, you can deploy up to 20% of your portfolio to gold ETFs.
Mutual fund investments are subject to market risk, please read the scheme-related documents carefully.
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