What Is Gold ETF And How Does It Work?

Gold is one of the most favoured investment options in India. Gold was traditionally bought in the form of jewellery, bars, and coins but the introduction of Gold ETF has given the bullion a major impetus. Like physical gold, Gold ETFs are assets and can be pledged as collateral with any gold loan company in India.

Gold ETF or Gold Exchange Trade Fund is an open-ended mutual fund and, like all other mutual funds, is an investment instrument that can be traded in the financial markets. Each unit of the Gold ETF is linked to 1 gram of gold and the price of the ETF keeps fluctuating just as the price of physical gold changes each day.The mutual fund house you are investing in, holds 99.5% pure physical gold or gold receipts against Gold ETFs.  

As mentioned earlier, the Gold ETF is supported by 99.5% pure physical gold bars. Fund houses are regularly audited to ensure that the ETFs are backed by physical holdings. The price of the ETF is listed on either of the two stock exchanges – NSE and BSE. The ETF can now be bought and sold through a broker. The investor will need a trading account to complete the transaction and a demat account to hold the ETFs. A nominal brokerage fee and fund management charges will be applicable when the investor buys or sells Gold ETFs. Gold ETFs are subject to SEBI Mutual Funds Regulations and the price change (per unit of the ETF) can be tracked on the stock exchange.

•Gold ETF is a good option for investors who seek diversity in their portfolios by adding gold as an investment. 

•Gold ETF is a low-risk investment that does not involve storage risks. This means that while physical gold can be stolen or misplaced, Gold ETF will be saved in your demat account in electronic form. Holding Gold ETFs also saves you the charges incurred on safety deposit lockers and vaults.    

•Gold ETF is the perfect investment option for investors who wish to invest small amounts regularly or in the form of SIPs. Going out shopping for physical gold each month is hardly practical.  

•Gold ETF investment is free from the making charges, government duty, and other transactional charges imposed on gold jewellery. 

•Gold ETF is highly liquid and can be traded online unlike physical gold.

•All transactions (buying and selling) of Gold ETF go through the National Stock Exchange (NSE) and Bombay Stock Exchange Ltd. (BSE) bringing transparency to these transactions. This avoids the risk of selling and buying physical gold through surreptitiouschannels.

•An ordinary buyer will not be able to ascertain the purity of physical gold bought from a showroom unless it is accompanied by a purity certificate. Gold held in the ETF format does not require such checks and certificates.     

•Just like physical gold you may choose to use the ETF as collateral and apply for a loan against gold in India.