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Gold ETFs - An Intelligent Diversification Strategy

By Aayush Upadhyay

1st Apr 2022

3 mins read

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Gold has been an investment asset for so long now that it has become as much part of our lives as it has of the lives of our ancestors. One of the main reasons it has endured the test of time is its limited availability. However, as much as we all know about gold in the form of jewellery, we probably don't know as much about the other types of gold investments that exist today.

In today’s blog, we are covering one such avenue: Gold ETFs.

What is an ETF?

Gold ETFs, or Exchange-traded Funds, are a new way to invest in gold through multiple channels. We must first understand the term ETF, which is a combination of mutual funds and stocks. ETFs behave like mutual funds but trade like stocks. As a result, these ETFs can now be focused on various schemes (BANK, FMCG, ETC), markets (NIFTY, SENSEX), and commodities (Gold, Steel, etc.). The most popular ETF in India, for example, is the NIFTY India ETF, which tracks the NIFTY (Top 50 companies in India). These ETFs, like mutual funds, can now be created by different companies, so you'll see HDFC NIFTY ETF, SBI NIFTY ETF, and so on.

Why to Trade ETFs?

ETFs, combine the benefits of mutual funds and stocks to get the best of both worlds. ETFs are traded on a stock exchange similarly as stocks are. To buy and sell ETFs, you must have a Demat account, which provides real-time prices. As stated, ETFs are similar to mutual funds in that professional managers manage the constituents of an ETF at a low cost. This is how a regular ETF works, but let's look at how a Gold ETF works.

What is Gold ETF and how does it work?

Now Gold ETF invests all of your money in 99.95 per cent pure gold as well as stocks of gold mining companies or even the RBI's gold monetisation scheme (Fixed Deposits for Gold). This means that all of your money is invested entirely in gold. As a result, if gold prices rise, so will the cost of your ETF, and vice versa.

But are ETFs safe?

Risks Involved in Gold ETFs

As the saying goes, there is no reward without risk. Gold ETFs are not without risk. The only risk present here is the price risk. Every asset is volatile, and the economics of Supply and Demand determines its price, so if gold becomes expensive, your ETF will soar, and vice versa. Besides that, there are no other risks associated with gold ETFs.

Digital Gold Vs Gold ETFs

Digital Gold Gold ETFs
Real gold is being purchased No real gold involved
GST 3% levied on all transactions No GST involved
Can be bought 24x7 Traded on Exchange, so can be purchased only during trading hours
No Demat Account is Required Demat account required to buy

We hope you are ready to diversify your portfolio, and diversifying with Gold is, we’d say a great bet. Might just plug Spenny here so that you can invest your spare change in Gold, but let’s leave that for later.

FAQs

How to buy Digital Gold and Gold ETFs?

To buy Digital Gold, you can use an online platform like Spenny, PayTM or Google Pay. But for Gold ETFs, you need to have a Demat account with any broker such as Zerodha, Groww, etc.

What are the tax implications of Gold ETFs and Digital Gold?

Both the assets have the same tax implications. If you sell it before three years, all your gains will be taxed per your income slab. And if sold after three years, the profits will be taxed at 20%.

Which gold ETF should I select?

Because ETFs are similar to mutual funds, it is best to choose a Gold ETF with the lowest expense ratio. A low expense ratio means that you will have to pay fewer charges.

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Made with ❤️ in India