Even as Covid-19 has brought the global economy to its kneesand wreaked havoc on markets, it’s the gold which is shining and investors continueto seek it as a haven. A few days back, the yellow metal closed at the highestsince late 2012 as investors sought insurance against the growing possibilityof economic recession.
Reserve Bank of India (RBI), in its recent monetary policyreport, said that as a financial asset, gold’s appeal typically rises in timesof financial turmoil. The apex bank acknowledged that growing concerns about adeep global slowdown due to Covid-19 boosted gold’s safe-haven demand.Precisely, gold is a strategic asset, highly liquid, no one’s liability andhistorically preserving its value over time.
Investment in gold doesn’t necessarily mean to own it inphysical form. Generally speaking, people store their wealth in gold as it’sconsidered most dependable metal during uncertainties and economic crises. Andtime 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 offinancial investment, the jewelry is pretty useless.
Even as there are different ways to invest in gold, you canown gold in dematerialized form via Exchange-Traded Funds or ETFs instead ofowning it in physical form. Over a period of time, the gold ETF has emerged asa most convenient and investor-friendly medium of investing. During the periodof the ongoing pandemic investment in gold ETFs has surged globally. Accordingto the World Gold Council’s (WGC) quarterly report global gold ETFs have added298 tonnes in the first quarter (January-March) of 2020, which is the highesttonnage 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 basedon gold prices. In other words, gold ETFs are units representing physical goldwhich may be in paper or dematerialised form. One Gold ETF unit is equal to 1gram 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 betraded 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 smallamounts.
Remarkably, gold ETFs are listed and traded on the NationalStock Exchange of India (NSE) and Bombay Stock Exchange Ltd. (BSE) like a stockof any company. You can buy and sell gold ETFs just as you would trade instocks. When you actually redeems gold ETF, you don’t get physical gold, butreceive the cash equivalent. Besides, the ETFs have much lower expenses ascompared 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 orless similar to physical gold because they are passively managed fund andclosely 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 fundmanagement (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 alsorequire a trading account with a broker.You can start with a small amount togain exposure to the gold price.
Remember, the fund itself holds gold derivative contractsthat are backed by gold. So, if you invest in a gold ETF, you won’t actuallyown any gold. Even when you redeem a gold ETF, you do not receive the gold inphysical form. Instead, you as an investor will receive the cash equivalent.
Conclusion
So, if you do not want to invest in physical gold due to thestorage hassles / doubt about purity of gold and are also looking to get taxbenefits, then investment in gold ETFs is ideal for you. It’s a tax efficientway to hold gold as the income earned from them is treated as long term capitalgain. Notably, these ETFs are accepted as collateral for loans.
Notably, the fund can be used to hedge gold commodity riskor gain exposure to the fluctuations of gold itself. If an investor hasincreased risk on his portfolio assets when the price of gold rises, owning agold ETF can help reduce risk in that position.
Meanwhile, those interested in investing in gold EFTs shouldalways seek advice from market consultants.