InvestorQ : What are gold backed exchange traded funds (ETFs) and how do they compare with other forms of gold investments?
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What are gold backed exchange traded funds (ETFs) and how do they compare with other forms of gold investments?

3 years ago

A gold-backed ETF is an exchange-traded fund (ETF) that aims to track the domestic physical gold price. Gold-backed ETFs are financial instruments comprised of units backed by physical gold which may be in paper or dematerialised form. One gold-backed ETF unit is typically backed by 1 gram of physical gold. Gold-backed ETFs are listed and traded on the National Stock Exchange of India (NSE) and Bombay Stock Exchange Ltd. (BSE) (“the Stock Exchange”). They trade like a company’s stock listed on the Stock Exchange. You can buy and sell gold ETFs just as you would trade in stocks. When you sell your units in a gold-backed ETF, you don’t get physical gold but cash. Trading of units of gold-backed ETFs takes place through a dematerialised account (Demat) and a broker, which makes it extremely convenient to buy and sell units of these ETFs electronically. Let us now look at how the gold ETF work in practice.

Firstly, there is less worry about gold purity than in other contexts as these funds claim to be backed by gold with 99.5% purity. Gold-backed ETF prices are listed on the NSE website and can be bought or sold through the broker when trading occurs on the Stock Exchange. It is important to note that unlike jewellery, gold-backed ETF units can be bought and sold at the same price Pan-India. How do you go about purchasing gold backed ETFs in India? Gold-backed ETFs can be bought at the stock exchange through a broker using a Demat account and trading account. A brokerage fee and fund management charges are also levied when you buy and sell these gold-backed ETF units. However, gold ETFs entail significant risks and you need to be aware of the same.

What are the risks involved with investing Gold-Backed ETFs? Since gold-backed ETFs are traded on the Stock Exchange, they are a very convenient tool to invest in and make for a desirable variation to your investment portfolio. An investor in gold faces several different kinds of risks. The Securities Exchange Board of India (SEBI) monitors trading on the Stock Exchange, which may help to manage certain risks in buying and selling units of gold-backed ETFs. Regular auditing of the gold bought by gold-backed ETFs is also conducted by government agencies. Like any listed and traded asset, the gold ETF is also vulnerable to market price risk and volatility risk. Despite these factors, gold ETFS can be a good investment for a variety of reasons.

What makes Gold-Backed ETF a good investment option? If you are someone who doesn’t want to invest in physical gold due to the storage hassles and are also looking to get tax benefits then you may want to consider units in gold-backed ETFs. Moreover, it is very easy to buy and sell gold-backed ETF units at the click of a button. You can purchase as low as one unit which is 1 gram. There is no premium or making charge, so you stand to save money if your investment is substantial. Each unit is backed by physical gold represented to be of 99.5% purity. It offers a transparent and real-time gold-backed ETF prices on the Stock Exchange. It is also a tax efficient way to invest as the income earned on units of gold-backed ETFs is treated as long term capital gain. You may also obtain other tax benefits like no wealth tax, no security transaction tax, no VAT and no sales tax. It is convenient as Demat holding does not involve theft of a physical asset and you also save on locker charges

Gold-backed ETFs are accepted as collateral for loans. No entry and exit load exists for gold-backed ETFs and that puts it an advantage over the normal mutual funds.

Finally, how do you go about selling the units in Gold-Backed ETFs that you are holding? Gold-backed ETFs can be sold on the Stock Exchange through the broker using a Demat account and trading account. Even though you are investing in an ETF that is backed by physical gold, remember that these ETFs are best used as a tool to benefit from the price of gold rather than to get access to physical gold. So, when you sell units in gold-backed ETFs, you are paid in rupees. Asset Management Companies may permit you to redeem your ETF units in the form of physical gold if you hold a total number of units that equate to a backing of 1kg of gold, or multiples thereof. The liquidation of the gold ETFs in the market is subject to available liquidity and cannot be sold otherwise. Only larger units can be directly sold to the fund.