Gold ETF

Gold ETF is an exchange-traded fund (ETF) that primarily tracks the domestic physical gold price. These are passively managed fund that majorly invests in gold bullion. Let's explore Gold ETF meaning, taxation rules, purpose and more here.

What is Gold ETF

Gold ETF, or Gold Exchange Traded Fund, is a commodity-based Mutual Fund that invests in assets like gold. These exchange-traded funds perform like individual stocks and are traded similarly on the stock exchange.

Exchange-traded funds represent assets, in this case, physical gold, both in dematerialised and paper form. An investor invests in stocks instead of the actual metal, and once it is traded, they are credited with the unit’s equivalent in cash instead of actual gold.

Purpose of Gold ETF

Despite being a commodity-based traded fund, gold ETF funds can be used as an industry exchange-traded fund as well. It is an ideal investment strategy to broaden a financial portfolio and to get exposure in a variety of sectors like gold mining, manufacturing, transport industry, etc. These traded funds are relatively simpler to obtain and provides an easier way to invest in the gold industry.

The gold ETFs can also be used as hedge protection against a fluctuating market, which makes them an alternative to insurance in one’s investment portfolio. For example, investors can use short-term exchange traded funds to minimise their loss if the price of gold suddenly plummets.

These exchange-traded funds are rated as some of the best defensive assets available in the market. It is considered to have the same class traits as bonds as many investors use them to insure their investments against economic fluctuations, and in extreme cases, currency debasement. The price of gold can rise by a significant margin if major currencies, like dollar, tend to fall weak. Investing in gold ETF can allow an individual to profit from that sudden drop.

Each unit of these traded funds represents 1 gram of 99.5% pure gold, which makes them ideal long-term investments, especially if an individual opts to invest larger sums or performs trade systematically.

How Does Gold ETF Work

A gold ETF holds gold assets like gold bullions or futures contracts, and is traded on a stock exchange. Here, the ETF price is directly linked to gold price. For instance, if gold price increases by 2%, the ETF value may also increase by 2% approx. On the similar note, if the gold price decreases, the ETF value should decrease too. 

Similar to other stocks, an individual can buy and sell shares of the ETF on the stock exchange.

What is Gold ETF Taxation

Taxed levied on gold ETFs are similar to that levied on purchase or selling of physical gold. An investor will be liable to pay capital gains tax if he or she trades these funds and profits. Taxes are applicable to both short-term and long-term investment in these traded funds.

There are two different types of tax levied gold exchange traded funds, long term capital gain tax, applicable for investments that are of 36 months or longer. In this case, an investor will have to pay a capital gains tax of 20%, along with indexations as applicable. For short-term investments, exchange-traded funds will attract capital gains tax as applicable to an individual’s current tax slab.

Advantages of Investing in Gold ETF

There are several benefits of investing in gold ETF funds rather than purchasing and stocking physical gold. Let’s take a look at why it can be a lucrative investment option.

• Easier Trading – The process of purchasing and selling gold ETFs is similar to any other equity-based fund. It makes the entire process easier, especially if the individual is trading stocks via a stockbroker or ETF funds manger. They are much easier to liquidate; they can be traded during working hours.
  
  Moreover, gold prices are publically available in the stock exchange. It makes the entire process transparent and allows an investor to track changes, even on an hourly basis.

• No Entry or Exit Loads – Gold ETFs do not attract any entry or exit loads, ensuring zero additional charges when purchasing or selling these funds.

• Tax Benefits – Other than capital gains tax, these traded funds do not attract VAT, Securities Transaction Tax, allowing an individual to save taxes on their investment.
  
  Investing in physical gold can make an individual liable to pay wealth taxes, especially if he or she purchases a lot of gold jewellery or gold bullions. Gold ETF investment do not attract any wealth taxes, which makes it better for tax saving.
  
  
• Less Market Risk – Gold prices usually do not fluctuate by a substantial margin, which allows prevention of a major loss even when returns on equities decrease by a substantial margin.
  
  As gold ETFs are available in variable denomination, it is ideal for all types of investors. One can start investing with as low as 1 unit of traded fund, which represents one gram of gold.
• Usage as Collateral – Gold ETFs can be presented as collateral against a secured loan borrowed from any financial institution. It presents more convenience than traditional hypothecation as the entire process stays significantly less time-consuming.

Who Should Invest in Gold ETF?

Gold ETFs are ideal for investors who want to track and reflect the actual price of gold in real time. Individuals who do not want to own the actual commodity but want to boost their income by trading on the precious metal should invest in these types of exchange-traded funds. It provides ample opportunity to gain market exposure on the price as well as performance of actual gold.

Gold-based traded funds have outperformed benchmark stock indices for the last few years, making them an attractive investment option for conservative borrowers. Moreover, gold exchange traded funds charges only 0.5% to 1% brokerage, which makes them suitable for individuals who want to save more on commission charges.