Gold Etf Funds: A Guide To Investing In India

Gold Exchange Traded Funds (ETFs) are a popular investment option in India, offering an easy way to invest in gold without the hassles of physical storage. Gold ETFs are similar to mutual funds, traded on stock exchanges like the National Stock Exchange of India (NSE) and Bombay Stock Exchange Ltd. (BSE). They are passive investment instruments that track the price of domestic physical gold, allowing investors to profit from gold price movements without the complexities of storing physical gold. Gold ETFs are considered a safer investment option, offering benefits such as diversification, liquidity, and tax efficiency. In this article, we will explore the key features, advantages, and steps to invest in gold ETF funds in India.

Gold ETFs vs. physical gold

Gold ETFs and physical gold are two different ways to invest in gold in India. Both have their own advantages and disadvantages, and it is important to understand the differences between the two before making an investment decision.

Gold ETFs

Gold Exchange-Traded Funds (ETFs) are mutual funds that invest in gold bullion and track the domestic gold price. They are traded on the stock exchanges, such as the National Stock Exchange of India (NSE) and Bombay Stock Exchange Ltd. (BSE). Gold ETFs are bought and sold just like stocks, and the trading is done through a dematerialised account (Demat) and a broker. One unit of a Gold ETF is typically equivalent to one gram of gold, and the minimum investment is usually one unit. Gold ETFs are highly liquid and can be bought and sold at any time. They are also relatively inexpensive, with no entry or exit loads, and provide transparency in pricing. Additionally, there are no storage costs or risks of theft associated with Gold ETFs. However, there may be brokerage and transaction costs involved.

Physical Gold

Physical gold, on the other hand, refers to buying gold in the form of coins, bars, jewellery, or gold biscuits. It is purchased directly from banks, jewellers, or dealers, and there are no intermediaries or contracts involved. Physical gold is easily liquidated and universally accepted. It also has emotional and social value in India. However, there are additional costs associated with physical gold, such as making charges, customs duty, and GST. Storage and insurance costs are also important considerations, as there is a risk of theft. The price of physical gold may vary from dealer to dealer and across different locations.

Both Gold ETFs and physical gold offer advantages and disadvantages for investors. Gold ETFs provide flexibility, liquidity, and transparency in pricing. They are also considered safer due to the absence of storage costs and risks of theft. On the other hand, physical gold is universally accepted, highly liquid, and has emotional and social value. However, it incurs additional costs and may be subject to variations in pricing. Ultimately, the decision between investing in Gold ETFs or physical gold depends on the investor's needs and goals.

Gold ETFs vs. equity investment

Gold ETFs are a modern and convenient way to invest in gold in India. They are exchange-traded funds that track the domestic price of physical gold. Each unit of a gold ETF represents a specific amount of gold, usually 1 gram, and is backed by physical gold of high purity. Gold ETFs can be bought and sold on the stock exchange, just like stocks, and are a good way to gain exposure to the gold market without the hassle of storing physical gold. They are also more flexible and liquid than physical gold.

Equity investments, on the other hand, refer to purchasing shares of ownership in a company. This type of investment typically involves buying stocks or shares of a company on the stock market. Equity investments can provide the potential for higher returns compared to gold ETFs, especially in growing companies. They also offer the opportunity to invest in specific sectors or industries that an investor believes in. Additionally, equity investments can provide voting rights and a claim on company assets.

One key difference between gold ETFs and equity investments is that gold ETFs are a passive investment instrument, meaning their performance is directly linked to the price of gold. In contrast, equity investments are active investments, where the performance of a company's stock depends on various factors such as the company's financial health, industry trends, and market conditions.

Another distinction is that gold ETFs are often seen as a defensive asset and a hedge against market fluctuations. When equities are down, gold often rises, providing a level of protection for investors. Gold ETFs are also subject to lower expenses compared to physical gold investments due to their unique structure.

However, equity investments offer the potential for higher returns over time, especially if the company performs well and increases in value. Equity investments also provide the opportunity for dividend payments, which can contribute to overall returns. Additionally, equity investments typically offer more diversification within a portfolio, as investors can choose to invest in various sectors and industries.

In summary, gold ETFs are a convenient and liquid way to invest in gold, offering protection against market fluctuations. They are ideal for investors who want exposure to gold without the challenges of storing physical gold. Equity investments, on the other hand, offer the potential for higher returns and diversification across different sectors. They are suitable for investors who are willing to take on more risk and actively manage their portfolio.

Gold ETFs vs. debt investment

Gold ETFs and debt investments are two very different investment options available to investors in India. Gold ETFs are a modern and convenient way to invest in gold, a precious metal that has been a trusted investment for Indians for centuries. Debt investments, on the other hand, are a more traditional investment option that offers a fixed rate of return.

Gold Exchange-Traded Funds (ETFs) are passive investment instruments that are based on gold prices and invest in gold bullion. They are traded on stock exchanges, like the National Stock Exchange of India (NSE) and the Bombay Stock Exchange Ltd. (BSE), providing liquidity and flexibility. Each unit of a Gold ETF represents a specific amount of gold, typically 1 gram, and can be bought and sold easily through a broker and a dematerialised (Demat) account. Gold ETFs are ideal for investors who want exposure to gold price changes without the challenges of storing and securing physical gold. They also offer transparency in pricing and lower expenses compared to physical gold investments.

In contrast, debt investments typically refer to investing in fixed-income instruments such as bonds, debentures, or fixed deposits. These investments offer a predetermined rate of return over a specified period. Debt investments are considered less risky than equity investments but usually provide lower returns. They are suitable for investors who prefer a more stable and predictable return on their investment.

One key difference between Gold ETFs and debt investments lies in their risk and return profiles. Gold ETFs are subject to market risks, and their returns fluctuate with the price of gold. On the other hand, debt investments generally offer fixed returns and are considered less risky. However, it is important to note that debt investments are not entirely risk-free, as they are subject to interest rate risk, credit risk, and liquidity risk.

Additionally, Gold ETFs provide investors with the benefit of diversification. As gold is often negatively correlated with other asset classes, investing in Gold ETFs can help reduce the overall risk of an investment portfolio. Debt investments can also be a part of a diversified portfolio, but they may not offer the same level of diversification as Gold ETFs.

Lastly, the taxation rules applicable to Gold ETFs and debt investments differ. In India, Gold ETFs are taxed as long-term capital gains, providing tax efficiency. On the other hand, debt investments are subject to short-term or long-term capital gains tax depending on the holding period, and the tax rates may vary according to the investor's income slab.

In summary, Gold ETFs and debt investments offer distinct advantages to investors in India. Gold ETFs provide liquidity, flexibility, and exposure to gold price changes, making them a convenient and cost-effective way to invest in gold. On the other hand, debt investments offer fixed returns and are generally considered less risky. Investors should carefully consider their investment goals, risk tolerance, and diversification needs when deciding between these two investment options.

Gold ETFs vs. gold bonds

Gold ETFs and gold bonds are two of the closest options to gold in its paper form. In these investment options, an investor will not possess any physical form of gold but will hold it like an investment and will have the option to redeem it as per their requirements.

Gold ETFs

Gold Exchange Traded Funds (ETFs) are funds that primarily invest in gold and can be bought and sold on the exchange. They are open-ended mutual fund schemes that are based on fluctuating gold prices. Gold ETFs are listed and traded on the National Stock Exchange of India (NSE) and Bombay Stock Exchange Ltd. (BSE) like a stock of any company. They can be traded in real-time and are exchanged at the ongoing market price of gold. One unit of Gold ETF is equivalent to one gram of gold. There are no extra costs associated with the gold pricing. Gold ETFs are also accepted as collaterals for loans.

The pros of investing in Gold ETFs are:

• They are more liquid compared to gold bonds as they can be traded in the open market at the free will of the investors as they do not have any lock-in period.
• They are open-ended mutual fund schemes and investors can remain invested for as long as they feel like and enjoy returns generated from the fluctuations in gold prices.
• They can be looked at as a systematic investment plan (SIP) mode, minimising the bulk one-time investment.
• They are accepted as collaterals for loans.
• They can be safely stored in a demat account.
• They are not subject to wealth tax.

The cons of investing in Gold ETFs are:

• There is no fixed interest/income assured as the returns depend on market fluctuations only.
• There are charges involved, such as fund management charges, brokerage, and administrative charges.
• Capital gains from ETFs are taxable.

Gold Bonds

Sovereign Gold Bonds (SGBs) are an alternate option to invest in gold. They are issued by the Government of India through limited-period offers that open 6 to 7 times a year. The minimum investment permitted in this bond is 1 gram of gold and the maximum is capped at 4 kg per fiscal year. The assured rate of interest on the bond is 2.5% disbursed half-yearly. The bonds can be purchased from nationalised banks, selected post offices, and designated stock exchanges either directly or via authorised agents. The SGBs are opened for purchase via weekly windows several times a year.

The pros of investing in SGBs are:

• They are a safe investment option for someone who is looking for an investment option for a long term of 5 to 8 years.
• The yield on the SGB is tax-friendly. Capital gains tax is exempted on the redemption amount on the bond.
• Anyone can invest in SGBs—individuals, trusts, HUF, charitable institutions, and universities. Both single holding and joint holding are allowed.
• SGBs can be used as collateral in case anyone wishes to take out loans.

The cons of investing in SGBs are:

• The maximum that an individual can invest in SGBs is 4kgs, unlike Gold ETFs where there is no upper limit.
• The SGBs have a lock-in for 5 years from the bond issue date.
• The redemption price at maturity may result in a marginal loss in the actual price of gold received compared to the prevailing price of gold on the redemption date.

Gold ETFs are more liquid compared to gold bonds as they can be traded in the open market at the free will of the investors as they do not have any lock-in period. Gold ETFs are also accepted as collaterals for loans. On the other hand, gold bonds are a safe investment option for those looking for long-term investments. The yield on gold bonds is also tax-friendly, with capital gains tax exempted on the redemption amount.

Gold ETFs vs. gold mutual funds

Gold Exchange Traded Funds (ETFs) and gold mutual funds are both investment options for those looking to invest in gold without having to physically store it. However, there are some key differences between the two.

Gold ETFs are passively managed investment instruments that aim to invest in gold with 99.5% purity. One unit of gold ETF is equivalent to one gram of gold. ETFs are traded on the stock exchange like stocks and can be bought and sold continuously at market prices. To invest in gold ETFs, you need a Demat account and a broker. The key expenses for gold ETFs include brokerage, expense ratio, and demat charges, taking the annual cost to approximately 0.5-1%. There are no exit loads on gold ETFs.

Gold mutual funds, on the other hand, are open-ended mutual funds that invest in units of gold ETFs. They are actively managed by a fund manager who buys and sells assets based on the fund's investment objective. Gold mutual funds allow Systematic Investment Plans (SIPs) for as low as Rs. 500, while gold ETFs require a minimum investment of one unit (equivalent to one gram of gold). Gold mutual funds can be purchased without a Demat account. The annual cost of gold mutual funds is between 0.6-1.2%, which includes the 0.1-0.2% management fee and the ETF fees. If you redeem a gold mutual fund within a year, you may have to pay an exit load of 1-2%.

In terms of liquidity, gold ETFs are less liquid due to a smaller market size in India. Gold mutual funds, on the other hand, are more liquid and can be easily purchased and sold.

Both gold ETFs and gold mutual funds provide investors with a way to diversify their portfolios beyond equity and debt. The choice between the two depends on factors such as the investor's preference for systematic investments over a long period (in which case gold mutual funds would be more suitable) or the desire to have a Demat account and the possibility of converting the gold into physical gold (in which case gold ETFs would be the better option).

Frequently asked questions