Gold ETFs: What are they and who are they suitable for?

Gold has been the preferred avenue for investment in India for centuries. In recent times, investors have had the option to invest in gold in several ways: Gold exchange-traded Funds (ETFs), digital gold, gold mutual funds and sovereign gold bonds, in addition to buying physical gold.

Among these, gold ETFs can be a cost-effective way to benefit from the potential growth of this commodity. Moreover, unlike physical gold, ETFs also offering liquidity.

In this article, you will understand how to invest in gold ETF funds online in India, exploring the features, benefits, and steps involved.

• Table of contents

• What are gold exchange-traded funds (ETFs)?
• How do gold exchange traded funds work?
• Benefits of investing in gold etf funds
• Risks of gold exchange-traded funds
• Why invest in gold exchange-traded funds?
• Four factors to consider when investing in gold exchange-traded funds (ETFs)
• How to invest in Gold ETFs?

What are gold exchange-traded funds (ETFs)?

A Gold Exchange Traded Fund (ETF) is a type of financial product that tracks the price of gold. The scheme invests in physical gold or gold-related assets, such as gold futures, and its value moves in line with the price of gold in the international markets. In India, Gold Exchange-Traded Funds are listed on major stock exchanges like the National Stock Exchange (NSE) and BSE.

How do gold exchange traded funds work?

Gold exchange traded funds work by pooling money from multiple investors and investing in physical gold or gold-linked assets. These funds are managed by asset management companies (AMCs) that buy and hold gold either in physical or dematerialised form. The value of the ETF shares is directly correlated to the market price of gold.

Benefits of investing in gold etf funds

• Higher liquidity: Gold ETFs are traded on stock exchanges, making them highly liquid. You can buy and sell them anytime during market hours, just like stocks.
• More transparency: The price of gold exchange traded funds is updated in real-time based on the gold price, providing complete transparency. Investors can easily track the value of their investments.
• Lower costs: ETFs have relatively low expense ratios compared to other mutual funds, especially active mutual funds.
• Diversification: Gold investments can act as a hedge against inflation and market volatility. When you invest in Gold ETF funds, you can achieve better diversification in your investment portfolio.

Risks of gold exchange-traded funds

These are the four of the risks your investments are subject to when you invest in Gold ETFs:

• Price fluctuations: Gold is a volatile asset, and its price can fluctuate based on global economic conditions, geopolitical events, and currency movements. This could result in short-term fluctuations if the price of gold falls.
• Management fees: Although gold exchange-traded Funds have low fees compared to actively managed funds, there are still fees that can eat into returns over time.
• Liquidity risk: While gold exchange traded funds are generally liquid, in rare cases, they may not be as liquid during times of market stress or volatility.

Why invest in gold exchange-traded funds?

Here are a few reasons why you might consider investing in gold ETF funds online:

• Hedge against inflation: Gold has historically been a good hedge against inflation. When currency values fall, gold prices often rise, making it a haven for investors.
• Diversification: Gold is an effective diversification tool in your investment portfolio. It can help spread overall risk.
• No physical handling: Unlike owning physical gold, you do not have to worry about storage or security. Gold exchange traded funds are convenient to hold, and you can buy or sell them easily.
• Accessibility: Gold ETFs are accessible to small and large investors alike. You can invest in as little as one unit, making it affordable for everyone.

Four factors to consider when investing in gold exchange-traded funds (ETFs)

• Expense ratio: Always consider the expense ratio of the ETF, as it determines the cost of managing the fund. A lower expense ratio is generally desirable since it means better net returns for the investor.
• Tracking error: The tracking error indicates how closely the ETF's performance mirrors the price of gold. A lower tracking error is preferable for more accurate exposure to gold prices.
• Liquidity: Check the trading volume of the Gold ETF on the exchange. Higher liquidity indicates that it may be easier to buy and sell quickly.
• Fund manager's reputation: The performance of Gold ETFs depends on the AMC managing them. Choose gold exchange-traded funds managed by reputable and experienced companies with a strong track record.

How to invest in Gold ETFs?

Investing in gold ETF funds online in India is simple and can be done through the following steps:

• Choose a brokerage account: You need a demat and trading account with a registered stockbroker to trade gold ETFs.
• Select a gold ETF: Once your account is set up, research and choose a gold exchange-traded fund.
• Place the order: Place an order for the units through your trading account. You can buy units in real-time at the current market price, just like buying stocks.
• Monitor your investment: After purchasing, keep track of the price movements and performance of your gold exchange traded fund.

In conclusion, gold ETFs provide a convenient, cost-effective, and transparent way for Indian investors to gain exposure to gold without the complications of owning physical gold. They offer the advantages of liquidity, low costs, and diversification, making them a suitable addition to a well-diversified investment portfolio. With the right approach, gold exchange-traded funds (ETFs) can be a powerful tool to preserve your wealth and hedge against inflation.

FAQs

How are gold ETFs different from physical gold?

Gold ETFs are traded on stock exchanges and electronically held while physical gold requires storage and may incur making charges.

Are gold exchange-traded funds and gold mutual funds the same?

Gold ETFs invest in physical gold or gold-related assets and are traded on stock exchanges. Mutual funds can invest in gold either through ETFs or in gold-related stocks such as gold mining companies.

Are gold ETFs safe?

No, gold ETFs in India are subject to market risk, including fluctuations in the price of gold in the market.

Can I invest in gold ETFs through SIP?

There is typically no Systematic Investment Plan (SIP) in ETFs. An asset management company may offer a variation of an SIP that enables investors to invest in regular instalments. However, not all companies have this provision.

What is the minimum amount required to buy a gold ETF?

The minimum amount required to buy a Gold ETF in India depends on the ETF's unit price based on the market value at the time of purchase.

Mutual Fund investments are subject to market risks, read all scheme related documents carefully. This document should not be treated as endorsement of the views/opinions or as investment advice. This document should not be construed as a research report or a recommendation to buy or sell any security. This document is for information purpose only and should not be construed as a promise on minimum returns or safeguard of capital. This document alone is not sufficient and should not be used for the development or implementation of an investment strategy. The recipient should note and understand that the information provided above may not contain all the material aspects relevant for making an investment decision. Investors are advised to consult their own investment advisor before making any investment decision in light of their risk appetite, investment goals and horizon. This information is subject to change without any prior notice.