Who Should Invest in Gold ETF?

How Does Gold ETF Work?

A Gold ETF works by investing in gold bullion or related assets, such as futures contracts, to track the price of physical gold. Each unit of a Gold ETF typically represents one gram of high-purity gold, allowing investors to own gold indirectly without holding the physical metal.

These ETFs are traded on stock exchanges just like individual stocks. When you buy a Gold ETF, you invest in dematerialised units that reflect the value of gold at the current market price. For instance, if the price of gold rises by 2%, the value of your Gold ETF units will likely increase by a similar percentage. Conversely, if gold prices fall, your investment value will decrease proportionally.

To start investing in Gold ETF, you need a demat and trading account. You can then place buy or sell orders during market hours. Transactions are settled electronically, and there is no need to worry about storage or security as the physical gold is held by the fund.

Gold ETFs are passively managed, ensuring transparency and low costs. They also offer high liquidity, enabling investors to buy or sell units whenever needed. This makes investing in Gold ETF an efficient way to gain exposure to gold prices while avoiding the challenges of storing and insuring physical gold.
 

Types of Gold ETFs

Gold ETFs in India cater to diverse investment preferences, offering flexibility and ease of trading. Here are the main types:

Physical Gold ETFs
These ETFs invest directly in physical gold and mirror its price movements. Each unit usually represents one gram of high-purity gold. They allow investors to gain exposure to gold without the need for storage or security.
Examples: Nippon India Gold ETF, SBI Gold ETF, and HDFC Gold ETF.

Gold Mining ETFs
While not commonly available in India as standalone funds, certain thematic mutual funds may include exposure to gold mining companies globally. These funds provide indirect exposure to the gold industry.

Leveraged Gold ETFs
Leveraged Gold ETFs are not currently prevalent in the Indian market due to regulatory restrictions. Indian investors typically look to international markets for such options.

Inverse Gold ETFs
Similar to leveraged ETFs, inverse gold ETFs are not widely available in India. Investors seeking to hedge against falling gold prices usually explore alternative instruments, such as gold derivatives.

Indian Gold ETFs, such as Axis Gold ETF and ICICI Prudential Gold ETF, offer investors an efficient way to track domestic gold prices. With SEBI-regulated funds and minimal market risks, investing in Gold ETF is a smart choice for diversifying portfolios and safeguarding against economic uncertainties.
 

Gold ETF Charges

Gold ETFs come with certain costs that investors should be aware of before investing. The primary charge is the expense ratio, which covers fund management, storage, and administrative expenses. Since these ETFs track physical gold, custodian and vaulting fees are included within this cost. In addition, investors may incur brokerage charges when buying or selling units on the exchange, along with a small bid–ask spread that can affect the final trade price. While these charges are generally lower than the costs of buying physical gold, they still influence overall returns and should be considered when choosing a Gold ETF.

What is Gold ETF Taxation?

The taxation on Gold ETFs in India is similar to that of physical gold. Investors are required to pay capital gains tax depending on the holding period of their investment.

Short-Term Capital Gains (STCG): If the holding period is less than 12 months, the gains are considered short-term and taxed at 20%.

Long-Term Capital Gains (LTCG): If the holding period is 12 months or more, the gains are classified as long-term and taxed at 12.5% with the benefit of indexation. Indexation adjusts the purchase price for inflation, reducing the taxable amount.

Unlike physical gold, investing in Gold ETF does not attract wealth tax or VAT. This makes Gold ETFs a more tax-efficient option compared to holding physical gold, especially for long-term investors.

Advantages of Investing in Gold ETF

Investing in Gold ETFs offers several benefits compared to purchasing physical gold, making it a popular choice for modern investors. Here are the key advantages:

Convenience and Security:
Gold ETFs provide ownership of high-purity gold in dematerialised form, eliminating the need for physical storage. This reduces concerns about theft, security, or storage costs.

Transparency and Liquidity:
Gold ETFs are traded on stock exchanges, providing real-time price tracking. Investors can buy or sell units during market hours, ensuring high liquidity and transparency in transactions.

Cost Efficiency:
Unlike physical gold, Gold ETFs do not attract making charges, wealth tax, or value-added tax (VAT). The only cost involved is a small brokerage fee, usually between 0.5% and 1%.

No Entry or Exit Loads:
Gold ETFs do not incur additional charges for entry or exit, ensuring that investments are cost-effective.

Portfolio Diversification:
Gold ETFs act as a hedge against market volatility and currency fluctuations. Allocating 5-10% of your portfolio to Gold ETFs can enhance stability and mitigate risks.

Collateral for Loans:
Gold ETFs can be used as collateral for secured loans, providing a quick and efficient way to access funds without selling your investment.

With these benefits, investing in Gold ETF is a secure and efficient way to gain exposure to gold prices while avoiding the challenges associated with physical gold ownership.
 

Risks of gold ETF

While gold ETFs offer a convenient and secure way to invest in gold without holding physical metal, they still carry certain risks that investors should consider. These risks arise from market fluctuations, tracking errors, and broader economic factors that can impact gold prices. Understanding these risks helps investors make informed decisions before adding gold ETFs to their portfolio.

Risks of Gold ETFs

• Gold prices can be volatile and influenced by global economic conditions, currency movements, and geopolitical events. 
• Tracking error may occur if the ETF’s returns do not perfectly match the performance of gold prices. 
• No interest or dividend income is generated, which may impact long-term returns. 
• Expense ratios and fund management costs can slightly reduce overall gains. 
• In periods of strong equity market performance, gold ETFs may underperform relative to other asset classes. 
• Liquidity can vary across ETFs, potentially affecting buy/sell prices in the market. 

Who Should Invest in Gold ETF?

Gold ETFs are an excellent investment option for individuals seeking a secure and hassle-free way to gain exposure to gold without the need for physical ownership. Here’s who should consider investing in Gold ETF:

Diversification Seekers:
Investors looking to diversify their portfolios can benefit from Gold ETFs. Gold acts as a hedge against market volatility, making it an ideal choice for creating a balanced investment strategy.

Risk-Averse Investors:
Gold ETFs are less volatile than equities and offer steady returns, making them suitable for conservative investors who prefer stability over high risk.

Tax-Conscious Investors:
Compared to physical gold, Gold ETFs are more tax-efficient as they do not attract wealth tax, VAT, or making charges. Long-term investors especially benefit from indexation on capital gains.

Convenience Seekers:
For those who want to avoid the storage and security concerns of physical gold, Gold ETFs offer a simple, paperless solution. They are traded on stock exchanges, providing flexibility and ease of access.

Short and Medium-Term Investors:
Gold ETFs are ideal for short to medium-term investment goals, as they mirror gold price movements and provide liquidity during market hours.

Whether you're a beginner exploring safe investments or an experienced investor aiming for portfolio diversification, Gold ETFs offer a cost-effective, secure, and liquid way to invest in gold.

How to buy Gold ETF in India?

Buying a Gold Exchange Traded Fund (Gold ETF) is fairly straightforward and works much like buying any other security on the stock exchange. A Gold ETF lets you invest in gold without holding physical metal; instead, it reflects the price of gold through units traded on the exchange. Here’s how you can go about it in India, including using 5paisa’s platform.

Step-by-Step: Buying Gold ETF

1. Open a Demat and Trading Account 
Before you buy a Gold ETF, you need a Demat account to hold the ETF units and a trading account to place orders. With 5paisa, you can open both together as a linked pair, ensuring your ETFs are held securely in your Demat. 

2. Fund Your Trading Account 
Transfer funds into your 5paisa trading account. Ensure you have sufficient balance to cover the cost of the ETF units you want to buy plus any applicable brokerage and statutory charges. 

3. Search for the Gold ETF 
In the 5paisa app or web platform, use the search or markets screen to find the Gold ETF you want to invest in. You can search by the ETF name or its trading symbol. Common Gold ETFs are listed on the National Stock Exchange (NSE) and the Bombay Stock Exchange (BSE). 

4. Place a Buy Order 
Once you’ve selected the Gold ETF, choose Buy, enter the quantity (number of units) and the price type (limit or market order). A market order buys at the prevailing price; a limit order executes only at your specified price or better. Review the order before submitting. 

5. Order Execution and Confirmation 
After you place the buy order, it goes to the exchange. When matched, the ETF units are credited to your Demat account, and you’ll receive a notification in 5paisa confirming the trade. 

7. Track Your Investment 
After purchase, you can track the value of your Gold ETF in the portfolio section of your 5paisa account. Prices fluctuate with the gold market, so regular review helps you stay informed. 

Why Choose 5paisa For Gold ETF Investing?

Using 5paisa to buy Gold ETFs combines simplicity with convenience: 

• Integrated platform: You can search, transact, and track all ETFs from the same dashboard. 
• Competitive costs: Brokerage plans on 5paisa are designed to be transparent and cost-effective, especially for frequent traders. 
• Mobile and web access: Whether you prefer the app or desktop, placing ETF orders is seamless. 
• Portfolio view: Your holdings, including Gold ETFs, are consolidated in one place for easy monitoring. 

Buying Gold ETFs through 5paisa does not mean you own physical gold, but it gives you exposure to gold prices in a secure, exchange-traded format with the ease of digital investing. Always consider your financial goals and time horizon when choosing the quantity and timing of your investment.

Conclusion

Gold ETFs provide a modern, efficient, and secure way to invest in gold. By eliminating the need for physical storage and offering tax advantages, they simplify the process of gaining exposure to gold prices. 

With benefits like transparency, liquidity, and portfolio diversification, investing in Gold ETF is ideal for both novice and experienced investors. Whether for short-term goals or long-term stability, Gold ETFs are a reliable choice to protect and grow your wealth.