Everything you need to know about investing in Gold ETFs

Published On: 23-Aug-2019

As per the Karvy Wealth Report 2018, Indians have around Rs.75 lakh crores of investment in physical gold as at the end of March 2018. However, a significant part of that would be in the form of jewelry, as Indians have been traditionally buying Gold for social reasons than for investment purposes. However, with the evolution of financial markets, it has now become possible for the investors to take an investment exposure in Gold without buying physical gold, and instead investing in Gold ETFs, and Gold funds. 

Investing in Gold ETF's

What is Gold ETF?

Gold ETF (Exchange Traded Fund) is an investment product which provides returns to the investors based on the returns generated by the underlying, i.e., physical gold, subject to tracking error and cost. As such, it offers a simplified method for investment exposure into the yellow metal. The investors may buy and sell ETFs during the exchange trading hours on a real-time basis. 

How do Gold ETFs work?

Gold ETFs are just like other mutual funds, the only difference being that the mutual funds create a portfolio of different equity and debt securities, while Gold ETF will only have physical gold in the portfolio. Here is how a Gold ETF typically works:

  1. Creation of ETF UnitsThe mutual fund creates Gold units with physical gold as the underlying. These units are listed on stock exchanges for buying and selling by the investors. 

  2. Trading of ETF Units through Stock Exchanges - You may invest in Gold ETFs by putting buy/ sell orders for ETF units through the stock trading account. The units will be credited/debited to/from your demat account, just like a normal stocks.

  3. Valuation Changes of ETF UnitsSince the underlying investments for the ETF units is the physical gold, any changes in the gold value will drive the changes in the NAV of the Gold ETF. However, there may be some variation due to demand and supply of Gold ETF units on exchange, demand and supply of physical gold in market and cost.

Benefits of Gold ETFs

The investors are benefited by investing in Gold ETFs as against in the physical gold in many ways:

  1. No Worries for storage & safety – ETF units are traded in digital form through the demat account. As such, the investors do not have to worry about the storage & safety of the gold investment. 

  2. Elimination of Risk of impure Gold – The underlying investment in physical gold is made only for the internationally acceptable hallmarked Gold and with minimum fineness (or purity) of 995 parts per 1000 (99.5%). As such, you do not need to worry about the quality, unlike physical gold wherein the investment value is at risk at the behest of the jeweler from whom you are buying the gold. 

  3. Price Similarity – As ETFs are traded on the exchanges, investors may invest at prevailing trading prices irrespective of geographical location difference. In case of physical gold, prices vary from city to city and jewelers to jewelers. 

  4. Cost-effective manner of investing in gold – The NAV of Gold ETFs moves in line with the movements in benchmark gold prices and may be considered as an alternative to the investment in physical gold. Further, the investors do not need to incur additional costs, e.g. quality inspection charges, locker charges for the safety of the gold, etc. and may monitor the investments through their demat accounts itself. 

  5. Higher Liquidity – Gold ETFs are listed on national stock exchanges, and the investors may manage to sell their investment in Gold ETFs by placing a sell trade through their trading accounts. Once the order is executed, the sale proceeds are credited to the demat account in a time-bound manner as per the settlement cycles of the stock exchange. Further, the investors may stay updated about their investment in Gold ETF by may checking the real-time valuation of the ETF units on the stock exchanges’ website.  

Why invest in Gold ETF?

Portfolio diversification across the asset classes helps in long term wealth creation. Further, Gold generally tends to have a negative correlation with the stock markets and is usually considered to be safe. It has consistently served as a hedge against inflation and can further absorb the market corrections to provide stability to the portfolio. As such, it certainly makes sense to diversify through investment in Gold through Gold ETFs. However, with a wide range of investment options available for investment in debt and equity, the allocation of gold should not generally exceed 10% of the total portfolio.

Disclaimers: The information set out above is included for general information purposes only and is not exhaustive and does not constitute legal or tax advice. In view of the individual nature of the tax consequences, each investor is advised to consult his or her or their own tax consultant with respect to specific tax implications arising out of their participation in the Scheme. Income Tax benefits to the mutual fund & to the unit holder is in accordance with the prevailing tax laws/finance bill 2017. Any action taken by you on the basis of the information contained herein is not intended as on offer or solicitation for the purchase and sales of any schemes of UTI mutual Fund. Please read the full details provided in SID and SIA carefully before taking any decision.

UTI AMC Ltd is not an investment adviser, and is not purporting to provide you with investment, legal or tax advice. UTI AMC Ltd or UTI Mutual Fund (acting through UTI TrusteeCompany Pvt. Ltd) accepts no liability and will not be liable for any loss or damage arising directly or indirectly (including special, incidental or consequential loss or damage) from your use of this document, howsoever arising, and including any loss, damage or expense arising from, but not limited to, any defect, error, imperfection, fault, mistake or inaccuracy with this document, its contents or associated services, or due to any unavailability of the document or any part thereof or any contents or associated services.