While investing in mutual funds, you need to remember that there several variants of the investment tools that are available in the market. Exchange-traded funds (ETFs), are also one of the mutual funds that you can invest in. These funds are shared investment funds that are known for tracking and replicating a particular index. Generally, these funds track a particular index, commodity, sector, or other assets. Then, the revenue from the said index can be allocated to different asset classes such as equity, debt, and gold. However, there is one way in which they differentiate themselves from mutual funds. The said way is that exchange-traded funds can be purchased or sold on an exchange in the same way that stocks can.
However, just like mutual funds, ETFs also come with different subcategories. One such subcategory of ETF is gold ETF funds. Listed below are the interesting aspects of gold ETFs:
What are gold exchange-traded funds?
Gold ETFs are a category of exchange-traded funds (ETF) that come to track the price of gold in the domestic market. They are an example of passive investment instruments which are related to gold prices and then invest in gold bullion. Simply put, gold ETFs are units that represent physical gold that may come in both papers and dematerialized forms. One gold ETF unit is equal to 1 gram of gold. Moreover, these funds are backed by physical gold that is very pure. These funds are a combination of the flexibility of stock investment and the simplicity of gold investments.
How do they work?
This type of ETF can be found listed and traded on both the Bombay Stock Exchange Ltd. (BSE) and the National Stock Exchange of India (NSE) like stocks of any company are. Gold exchange-traded funds are known for trading on the BSE & NSE’s cash segment. Similar to any other company stock, it is easy to buy and sell gold ETFs continuously at market prices.
When you are buying Gold ETFs, you are purchasing the gold in an electronic form. One needs to buy and sell gold ETFs just as they would trade in stocks. After redeeming a gold ETF, you won’t get physical gold. Instead of gold, you are given the cash equivalent. The gold ETFs trade takes place with the help of a Demat account and a broker. With the help of a broker and Demat account, you easily invest in gold through electronic means.
What are its advantages?
Listed below are some of the common benefits of gold ETFs:
- They serve as a shield against inflation:
Inflation is a situation in which the price of necessary commodities hikes exponentially. You may think that you don’t need to invest in such times. But, in reality, it is during such times that you need to continue investing. That’s where a gold ETF steps in. Many regard gold as a safe investment option. That’s because they can be used to protect yourself against currency inflation and fluctuation.
- These funds enable simple transactions:
Another benefit of these types of ETF is that you can buy and sell gold ETFs at any time of the day, i.e., when the stock exchange is open. Also, these transactions can be carried out from any part of the country. Furthermore, you will also not be affected by the local gold price differences due to VAT or other kinds of taxes.
- They are tax-efficient:
This type of ETF is tax-efficient way as the income earned from Gold ETFs is treated as capital gains, short-term or long-term, which is dependent on the holding period. While they attract long-term capital gains tax, there is no wealth tax, a securities transaction tax on gold ETFs, or VAT levied on the investors.
However, similar to stock market investments, you have to be very cautious while your funds are allocated to your gold ETF. The rush buying and selling of your gold ETF may result in heavy losses that could heavily affect your investment portfolio.
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