Gold ETF, or Exchange Traded Fund, is a commodity-based Mutual Fund that invests in assets like gold.
These exchange-traded funds and are traded on the stock exchange perform like individual stocks. They represent assets-physical gold, both in dematerialised and paper form.
The Purpose of Gold ETF-
The gold ETF funds can be used as an industry exchange-traded fund. To broaden a financial portfolio and to get exposure in a variety of sectors like gold mining, manufacturing, transport industry, etc. they are a good option. They are easier to obtain and provide a way to invest in the gold industry.
They can be used as hedge protection against a fluctuating market, which makes them an alternative to insurance in one’s investment portfolio.
They are the best defensive assets available and considered to have the same class characteristics as bonds to insure against economic fluctuations and currency debasement.
The price of gold can rise by a significant margin if major currencies, like dollar, tend to fall weak. Gold ETF can allow to benefit from that sudden drop.
Each unit of these traded funds represents 1 gram of 99.5% pure gold, which makes them ideal long-term investments, especially if an individual opts to invest larger sums. Taxed levied on gold ETFs are the same to that levied on purchase or selling of physical gold.
In the case of long-term capital gains for investments held for 36 months or more, an investor will have to pay a capital gains tax of 20%. Indexations are applicable. For short-term investments, they will attract capital gains tax as applicable to an individual’s current tax slab.
Who Should Invest and why?
- Individuals who do not want to own the actual commodity but want to boost their income by trading on the precious metal should invest in these types of exchange-traded funds.
- Gold-based traded funds have outperformed benchmark stock indices for the last few years, making them an attractive investment option even for conservative borrowers.
- Gold exchange traded funds charges only 0.5% to 1% brokerage, which makes them suitable for individuals who want to save more on commission charges.
- Gold ETFs are ideal for investors who want to track and reflect the actual price of gold in real time. It is advisable to keep the investment in gold within 5% to 10% of one’s total investment portfolio to help will help build a robust investment outline and maintain a stable return.
Advantages
- The process of purchasing and selling gold ETFs is just like any other equity-based fund making the entire process easier, especially if the individual is trading stocks via a stockbroker or ETF funds manger. They are much easier to liquidate. Gold-prices are available in the stock exchange and allowing to track changes, even on an hourly basis.
- Gold ETFs do not attract any entry or exit loads, ensuring zero additional charges when purchasing or selling these funds. There is just 0.5% to 1% brokerage on transactions.
- Other than capital gains tax, these traded funds do not attract VAT, Securities Transaction Tax or Value Added Taxes, allowing an individual to save taxes on their investment. Investment in physical gold can attract wealth taxes, when a lot of gold jewellery or gold bullions are traded. Gold ETF investment do not attract any wealth taxes.
- Gold prices usually do not fluctuate by a substantial margin, preventing a major loss even when returns on equities decrease by a substantial margin making them less sensitive to market risks. One can start investing with as low as 1 unit of traded fund, which represents one gram of gold.
- They can be presented as collateral against a secured loan borrowed from any financial institution hence more convenience than traditional hypothecation as the entire process stays significantly less time-consuming.
Bhoi Smrutirekha Dharanidhar