Persisting in its shine through 2024, the price of gold is anticipated to reach Rs 70,000 per 10 grams in the local market. This projection is attributed to a stable rupee, geopolitical uncertainties, and the deceleration of global economic growth, as indicated by experts.
Buying gold in tangible or physical forms such as jewelry, gold coins, or bars can be significantly expensive. In contrast, possessing it in a paper form like gold exchange-traded funds (gold ETFs) is more cost-effective, with prices aligning closely to the actual value of gold.
Also read: 6 ways to buy and invest in gold
Hence, if your goal is to capitalize on the potential increase in the value of gold in the future, opting for the ETF route is the solution. Comparable to mutual funds, where the investment’s value mirrors that of the underlying securities (equity or debt), in the case of gold ETFs, gold serves as the underlying asset.
As an exchange-traded fund, the gold ETF is exclusively tradable on stock exchanges, eliminating the need for maintaining physical gold. Moreover, unlike jewelry, coins, and bars, which involve substantial initial buying and selling charges, the gold ETF incurs significantly lower costs. Another notable benefit is the transparency in pricing. The purchase price closely aligns with the actual gold price, making it a benchmark for the physical gold price.
How to invest in gold ETFs
Gold ETFs are actively traded on the cash market of the National Stock Exchange, akin to regular company stocks, enabling continuous buying and selling at prevailing market prices. To participate, you’ll require a trading account with a stockbroker and a demat account. Whether opting for a lump-sum purchase or periodic investments through systematic investment plans (SIP), the flexibility is yours to decide. Additionally, it’s possible to buy as little as 1 gram of gold. Establishing a systematic investment plan is advisable, emphasizing consistent contributions over attempting to time the market fluctuations.
Steps in buying Gold ETF (Through an Online Trading Account)
Step 1: Open an online trading and demat account with a stock broker
Step 2: Log in to the website of the broker’s online trading portal using your login ID and password.
Step 3: Choose the Gold ETF you want to invest in
Step 4: Place the buy order for the purchase of a specified number of Gold ETF units
Step 5: Web system debits your bank account (Fund transfer through linked savings account)
Step 6: Units are credited to your demat account on trade day + 2nd day
Gold ETF charges
While gold ETFs don’t impose entry or exit charges, there are three associated costs. Firstly, the expense ratio, typically around 1 percent, covers fund management and is generally lower compared to other mutual funds. Secondly, there’s the broker cost, incurred with each unit purchase or sale. Thirdly, although not a direct charge, the tracking error affects returns. This error results from fund expenses and cash holdings, leading to a deviation from actual gold prices in the market.
How to pick the right Gold ETF
With 15 Gold ETFs available in the market, their performance generally aligns with the movement in physical gold prices. It is crucial to monitor tracking error and trading volumes. Opting for funds with lower tracking error and higher trading volumes is advisable. Given the absence of fund lock-ins, buying and selling can occur during trading hours. To maximize returns, it is recommended to avoid partial withdrawals or early exits and instead, align your investments with a long-term financial goal.
Gold ETFs in India
Source: ET Markets
Taxation
When unitholders make a profit upon redeeming gold ETF units, they become liable for capital gains tax. In Gold ETFs, both long- and short-term capital gains are subject to taxes. Long-term capital gains tax, at a rate of 20% after indexation, applies to gold ETF investments held for more than 36 months. For investments held up to 36 months, considered short-term, capital gains tax is levied according to the applicable tax slab of the unitholders. Unlike other forms of gold investment, such as buying physical gold, gold ETFs do not attract wealth tax, GST, or security transaction tax. It’s advisable to seek guidance from your financial advisor before making any investment decisions.
