Everybody loves glittering gold, whether in the form of jewelry, ornaments, or a simple gold bar. But, when you are talking about gold ETFs, that is not the case. You will not get any glittering physical gold that you can put into your locker. It stands for Gold Exchange Traded Funds and is a commodities ETF consisting of just gold as its primary asset. ETFs behave similarly to individual stocks and trade on an exchange in a similar way. However, the fund itself contains gold-backed derivative contracts using gold as the underlying asset. Therefore, if you invest in a gold exchange-traded fund, you will not own any physical gold.
The Principle of Investing in Gold ETF
Investors use gold exchange-traded funds to monitor and reflect the price of gold. Although the assets the fund holds get backed by precious metals, the goal is not for investors to hold physical gold via their participation in the fund. Instead, an investor has the option to acquire exposure to the performance of gold and the price changes of gold when they invest in the best gold ETF.
Why invest in a gold exchange-traded fund?
Diversification of a portfolio among asset classes facilitates long-term wealth building. In addition, gold has an adverse correlation with stock markets and is a secure investment. It has regularly acted as a hedge against inflation and can absorb market declines to give portfolio stability. Thus, it makes perfect sense to diversify with gold exchange-traded fund investments. Gold investment allocation should typically not exceed 10% of the entire portfolio since various debt and equity investment choices are available.
8 Things You Must Know About Buying Gold ETF
Knowledge before investing in gold exchange-traded funds is essential, and below are certain things you must know:
1) Choosing the Appropriate Gold ETF:
There are as many as twelve different gold ETFs in India available on the market. The determination of these funds’ success primarily happens when changes in the price of actual gold occur. Therefore, you need to ensure to keep a close check not only on the trade volumes but also on the tracking faults. Choose investments with a larger trading volume and reduced tracking inaccuracy if you can. During the trading hours of the stock market, you can purchase or sell any ETF unit listed on the exchange to start the investment.
2) A Low-Cost Way to Invest in Gold:
As a replacement to the investment in actual gold, gold exchange-traded funds have a net asset value that tracks the price of gold as a benchmark and swings up and down in tandem with those price changes. Thus, the investors do not have to bear any extra expenditures, such as those associated with quality inspection charges or storage charges for the protection of physical gold. Instead, they can monitor their investments directly via their Demat accounts.
3) Transactions are Simple:
The best gold ETFs in India are bought and sold during regular market hours. As a result, the ETFs’ prices are publicly known on the stock market, and they are comparable to the costs of actual gold in terms of the value per gram they represent. This instrument simplifies investing in gold exchange-traded fund units and makes the transaction more open and transparent.
4) No Need to Worry About Storage or Theft:
Because the gold exchange-traded fund units given to us have a connection to our credentials, the dematerialized version of the paper gold would be secure comparing it to actual gold, which can be stolen. The bullion purchased using ETF units is deposited with the custodian, where it is both held and insured. You, as an investor, do not need to be concerned about this process.
5) Provides Liquidity:
Suppose you are in immediate need of liquid cash. In that case, a gold ETF may be able to assist you in accomplishing this goal in a short time at the expense of a minimal brokerage fee incurred during the transaction. In addition, gold exchange-traded funds are considered highly liquid funds since investors may redeem their holdings in the fund immediately rather than having to wait for a more extended time.
6) Gold ETFs are Taxable like Other Assets:
When gold exchange-traded funds are redeemed, the investor is responsible for paying taxes on the capital gain. There is a teeny-tiny bit of a distinction here. Because they are considered non-equity assets, the definition of “short term” for these investments increases to three years from one year. However, after accounting for the advantageous effects of indexation, long-term capital gains will still be subject to a tax rate of 20%.
7) Gold ETFs Acts as a Hedge:
People need to have a solid grasp on this particular aspect of gold ETFs since it is perhaps the most crucial one. They are not investments like equities or debt that have the potential to increase in value over time. Instead, these are known as hedges. Their design is to preserve value during political and economic hardship when the values of other assets are under pressure.
8) Can be Used as a Collateral:
You may use gold exchange-traded funds as collateral for a secured loan from a bank or non-banking financial institution. As it’s electronic with transparent pricing, it’s more convenient than conventional collateral.
Like any investment, buying gold carries some risk. On the other hand, the course of history has shown that it does exceptionally well during moments of inflation and bear markets. A cautious investor may find that investing in the best gold ETF in India is a good investment choice. In exchange for your investment, you will receive a share of the current value of the gold exchange-traded funds; however, you will be required to invest a much smaller amount than you would if you were going to invest in actual gold. A gold exchange-traded fund is an investment with a low level of risk, and having a portion of your portfolio invested in it may help you reduce the impact of inflation over the long run.