Even as Covid-19 has brought the global economy to its knees and wreaked havoc on markets, it’s the gold which is shining and investors continue to seek it as a haven. A few days back, the yellow metal closed at the highest since late 2012 as investors sought insurance against the growing possibility of economic recession.
Reserve Bank of India (RBI), in its recent monetary policy report, said that as a financial asset, gold’s appeal typically rises in times of financial turmoil. The apex bank acknowledged that growing concerns about a deep global slowdown due to Covid-19 boosted gold’s safe-haven demand. Precisely, gold is a strategic asset, highly liquid, no one’s liability and historically preserving its value over time.
Investment in gold doesn’t necessarily mean to own it in physical form. Generally speaking, people store their wealth in gold as it’s considered most dependable metal during uncertainties and economic crises. And time has proved that gold is more stable than any other asset classes. Generally, people own the gold in the form of jewelry. But as an instrument of financial investment, the jewelry is pretty useless.
Even as there are different ways to invest in gold, you can own gold in dematerialized form via Exchange-Traded Funds or ETFs instead of owning it in physical form. Over a period of time, the gold ETF has emerged as a most convenient and investor-friendly medium of investing. During the period of the ongoing pandemic investment in gold ETFs has surged globally. According to the World Gold Council’s (WGC) quarterly report global gold ETFs have added 298 tonnes in the first quarter (January-March) of 2020, which is the highest tonnage addition since 2016. And in value terms, the addition was $23 billion, the highest quarterly amount ever in absolute dollar terms.
Let’s today understand all about gold ETFs.
What is a gold ETF?
A Gold ETF is a passive investment instrument that is based on gold prices. In other words, gold ETFs are units representing physical gold which may be in paper or dematerialised form. One Gold ETF unit is equal to 1 gram of gold and is backed by physical gold of very high purity.
What’s the advantage of investment in gold ETFs?
Gold ETFs are held in demat / electronic form and can be traded on a stock exchange just like buying and selling shares of a company. They are tax efficient and gives flexibility to the investor to invest in small amounts.
Remarkably, gold ETFs are listed and traded on the National Stock Exchange of India (NSE) and Bombay Stock Exchange Ltd. (BSE) like a stock of any company. You can buy and sell gold ETFs just as you would trade in stocks. When you actually redeems gold ETF, you don’t get physical gold, but receive the cash equivalent. Besides, the ETFs have much lower expenses as compared to charges for owning gold in physical form.
Gold in physical form cannot be traded on stock exchanges. It is loaded with risk of impurity.
What are the returns on investment in Gold ETFs?
Returns of all Gold ETFs schemes are almost same and more or less similar to physical gold because they are passively managed fund and closely track the performance and yield of gold in the spot market. Put simply, they just hold physical gold on behalf of investors and no active fund management (to take advantage of price fluctuation in gold) is involved.
How to invest in gold ETFs?
You require a Demat account to invest. Besides, you also require a trading account with a broker.You can start with a small amount to gain exposure to the gold price.
Remember, the fund itself holds gold derivative contracts that are backed by gold. So, if you invest in a gold ETF, you won’t actually own any gold. Even when you redeem a gold ETF, you do not receive the gold in physical form. Instead, you as an investor will receive the cash equivalent.
So, if you do not want to invest in physical gold due to the storage hassles / doubt about purity of gold and are also looking to get tax benefits, then investment in gold ETFs is ideal for you. It’s a tax efficient way to hold gold as the income earned from them is treated as long term capital gain. Notably, these ETFs are accepted as collateral for loans.
Notably, the fund can be used to hedge gold commodity risk or gain exposure to the fluctuations of gold itself. If an investor has increased risk on his portfolio assets when the price of gold rises, owning a gold ETF can help reduce risk in that position.
Meanwhile, those interested in investing in gold EFTs should always seek advice from market consultants.