Understanding Gold ETF
May 23, 2022
Can you get cash in the return of your ETFs?Indians have been fond of investing in Gold for ages. Our ancestors, too, invested in Gold. But with changes in technology, you can invest smartly in the same trusted Gold. There are several new ways like the ETF.
What are Gold ETFs?
Gold ETFs are commodities funds that are traded like stocks and have grown in popularly as a type of investment. Even though they are comprised of assets backed by Gold, investors do not possess the physical commodity. Instead, they possess minor amounts of gold-related assets, which diversifies their portfolio. In general, these instruments enable investors to get exposure to Gold through smaller investment holdings than are possible through physical investment and futures contracts. However, many investors fail to see that the cost of trading gold-tracking ETFs may exceed its ease.
So how can you buy ETFs?
You may use your existing trading account to purchase and sell gold ETFs on the regular stock exchange. These Gold ETFs, like shares, will be credited or debited to your Demat account and have no lock-in limitations.
Gold ETFs differ from traditional mutual funds. When you purchase a few units of a mutual fund scheme from the AMC, the fund’s AUM grows, and when you redeem units, the fund’s AUM decreases. In the case of ETFs, ownership is solely transferred from seller to buyer, and the ETF AUM remains unchanged.
You can see the Gold too?
Did you know that when you engage in a gold exchange-traded fund (ETF), actual Gold is held even though you can’t see it?
The price of Gold is connected to gold ETFs. Each unit of a gold ETF is linked to a certain amount of Gold. Gold exchange-traded funds (ETFs) now invest in and hold actual Gold on behalf of owners. There are several more aspects to gold ETFs.
What is the worth of Gold?
Mutual funds must adhere to the SEBI’s gold valuation regulations. The value must be calculated using prices surveyed by the London Bullion Market Association (LBMA). These prices must then be translated to Indian measurements and currency. Furthermore, transportation costs associated with shipping, such as Gold from London and fictitious customs duties, taxes, and other levies, must be factored into the gold price.
Is it better to buy gold jewellery?
Gold ETFs invest in the purest Gold available. There is consistency in what you are charged as an investor, with a set maximum limit. The mutual fund industry’s competitive nature guarantees that TERs are kept below the maximum level. In contrast, with gold jewellery, you would also have to pay manufacturing costs, which would vary from jeweller to jeweller. When you buy gold jewellery, you may face making costs of 5% or more and GST. While the Necessary Hallmarking of Gold Jewellery became statutory this year, there is no mandatory necessity for jewellers to hallmark gold. The procedure of confirming the purity and fineness of Gold is known as hallmarking. So we still feel that buying ETF is a better option.
What is the bare minimum required?
This is dependent on the current gold price. You may be surprised to know that one can invest as little as Rs 41-Rs 42 in a Gold ETF. This is because numerous mutual funds have tied every unit of their Gold ETFs to the spot price of 0.01 gram of Gold, making them more accessible to small investors.
Is it possible to convert my Gold ETF into actual Gold?
You certainly can do so. However, you must have a minimum quantity of units worth one kilogram of Gold. It is due to the usual size of a gold bar being one kilogram. This equates to around 1.15 lakh units for ETFs with units fixed to 0.01 gram of Gold. This equates to a minimum of 2,000 units for ETF units tied to 0.5 grams of Gold. You can go straight to the fund house and request actual Gold or cash out your assets.
Can you get cash in the return of your ETFs?
If you want cash, the fund house will sell the Gold on your behalf and pay you. If you request physical Gold and do not have a GST number, keep in mind that you will be charged GST on the transaction. There is also the issue of choosing a secure location to store your Gold. As a result, rather than opting for actual Gold, it is best to sell the ETF units on the exchange or to the fund company and withdraw your capital. However, choose an ETF with a high asset size and adequate traded volumes on exchanges so that there are no significant impact charges when you deal on exchanges.
How are the profits from Gold ETFs taxed?
Long-term profits beyond three years are taxed at a rate of 20% with an indexation advantage. Before the three-year holding period, short-term capital gains are added to your income and taxed at your slab rate.
What actions should investors take?
Keep 5-10% of your portfolio allocation in gold-linked financial products as a hedge against inflation and diversifier. However, before investing additional money in Gold, you should first review your current holdings.
Summary:
So we suggest that if you buy Gold just as an investment then do not pay for the making charges of the jewellery. Until and unless someone is going to be using the jewellery, please don’t buy it. Instead, we suggest you buy Gold ETFs. This is the new and safer way to buy Gold. The design never gets out of fashion here! Also, when you need the money, get it converted with the current rate of Gold. Cash shall be ready for you in your hour of need. This is a wise decision to make.
