7 Benefits of investing in gold ETFs

Date : 05/09/2020
Read: 4 mins

The gold market is currently on an upward trajectory. The time to invest in gold is now and the medium is gold ETFs.

The ongoing global pandemic has thrown financial markets into disarray. While most traditional investments are experiencing heavy volatility, gold is one asset that has been steadily on the ascent in these times. It acts as a hedge against inflation and as a currency in times of economic instability, making for a great portfolio diversifier.

The gold market is currently bullish and on an upward trajectory. If you are looking to purchase this precious metal, gold exchange-traded funds (ETFs) offer a digitally savvy, safe, and convenient way to add gold to your portfolio. But before you start exploring gold ETFs, there are some key things you should know.

What to know before investing in gold ETFs

Complete your KYC – You will have to comply with all KYC formalities before you can make an investment. You will also need to have a valid demat account to store your digital purchase.
Look for reasonable transaction charges – Buying and selling ETFs will entail a transaction cost that can vary from 0.5% to 1% of the purchase value (plus GST). Look for an intermediary with low charges, especially if you plan on making frequent short-term trades.
Choose the right fund house – The reputation of the fund house and the fund manager is equally important. Assess the performance of different funds over the last couple of years before you zero in on your choice.
Monitor price movements – Get a fair understanding of the way gold prices move. You could set alerts on your phone for highs and lows, and study movement charts to understand trends. As with equities, you would ideally want to buy at lower prices and improve your chances of making a profit whenever you decide to sell.
Monitor your investment – Make it a point to regularly check the trades executed on your behalf by your fund manager. This can help you assess the performance of your portfolio vis-à-vis that of your peers and benchmark prices.
Optimise your holding period – Gold prices tend to be cyclical and the investment works best as a short- to medium-term option. Over the long term, your funds can be put to better use, since returns on gold tend to average only around 10%.
Do not over-leverage gold – As mentioned, gold should be used only as a risk diversifier. It should play the role of a stabiliser in your portfolio. Allotting 5% to 10% of your total funds towards gold ETFs should be ideal.

Benefits of investing in gold ETFs

Convenient unit size – You can purchase, sell and accumulate gold in fractions as small as a single unit (equal to one gram) of gold. This makes gold an affordable asset class for portfolios of all sizes.
Transparency – Gold prices are updated on the stock exchange periodically, every day. This makes prices transparent and uniform, which is not possible when purchasing gold from a physical store (thanks to reseller margins and state taxes).
Ease of transacting – You can buy and sell gold ETFs from the convenience of your home. Log in on your laptop or smartphone anytime during the trading hours of the stock exchange without having to visit a bank or jeweller.
Low transaction costs – Other than the brokerage charges, there are no other transaction costs or entry/exit loads when you purchase an ETF. On the other hand, with physical gold you would have pay 7% to 10% as making charges on every purchase or sale transaction.
Security – Holding your asset in digital format provides utmost security. You don’t need to fear that your gold will be stolen, or make additional payment towards locker charges for safekeeping.
Tax benefits – Holding on to your gold ETF investment for more than a year brings long-term capital gains benefits. With this indexation benefit, you can reduce your tax liability when selling your gold. What’s more, gold ETFs do not attract any VAT, wealth tax, or securities transaction tax.
Collateral use – As gold prices remain stable, you can forward your ETF investment as collateral if you need to borrow funds from a financial institution. Lenders usually offer loans ranging from 65% to 85% of the market value of the investment.

Related: Global investment in Gold ETF

Conclusion

As with any other investment, you need to tread cautiously with gold ETFs. It is better to use gold as a hedge investment rather than as a daily profit-trading tool. The selling price of gold on a given day is lower than the purchase price due to GST, bank transaction charges, etc., which makes short-term speculation a risky proposition. Look at the difference between E-gold and gold ETFs.

Disclaimer: This article is intended for general information purposes only and should not be construed as investment or tax or legal advice. You should separately obtain independent advice when making decisions in these areas.

What to know before investing in gold ETFs

Complete your KYC – You will have to comply with all KYC formalities before you can make an investment. You will also need to have a valid demat account to store your digital purchase.
Look for reasonable transaction charges – Buying and selling ETFs will entail a transaction cost that can vary from 0.5% to 1% of the purchase value (plus GST). Look for an intermediary with low charges, especially if you plan on making frequent short-term trades.
Choose the right fund house – The reputation of the fund house and the fund manager is equally important. Assess the performance of different funds over the last couple of years before you zero in on your choice.
Monitor price movements – Get a fair understanding of the way gold prices move. You could set alerts on your phone for highs and lows, and study movement charts to understand trends. As with equities, you would ideally want to buy at lower prices and improve your chances of making a profit whenever you decide to sell.
Monitor your investment – Make it a point to regularly check the trades executed on your behalf by your fund manager. This can help you assess the performance of your portfolio vis-à-vis that of your peers and benchmark prices.
Optimise your holding period – Gold prices tend to be cyclical and the investment works best as a short- to medium-term option. Over the long term, your funds can be put to better use, since returns on gold tend to average only around 10%.
Do not over-leverage gold – As mentioned, gold should be used only as a risk diversifier. It should play the role of a stabiliser in your portfolio. Allotting 5% to 10% of your total funds towards gold ETFs should be ideal.

Benefits of investing in gold ETFs

Convenient unit size – You can purchase, sell and accumulate gold in fractions as small as a single unit (equal to one gram) of gold. This makes gold an affordable asset class for portfolios of all sizes.
Transparency – Gold prices are updated on the stock exchange periodically, every day. This makes prices transparent and uniform, which is not possible when purchasing gold from a physical store (thanks to reseller margins and state taxes).
Ease of transacting – You can buy and sell gold ETFs from the convenience of your home. Log in on your laptop or smartphone anytime during the trading hours of the stock exchange without having to visit a bank or jeweller.
Low transaction costs – Other than the brokerage charges, there are no other transaction costs or entry/exit loads when you purchase an ETF. On the other hand, with physical gold you would have pay 7% to 10% as making charges on every purchase or sale transaction.
Security – Holding your asset in digital format provides utmost security. You don’t need to fear that your gold will be stolen, or make additional payment towards locker charges for safekeeping.
Tax benefits – Holding on to your gold ETF investment for more than a year brings long-term capital gains benefits. With this indexation benefit, you can reduce your tax liability when selling your gold. What’s more, gold ETFs do not attract any VAT, wealth tax, or securities transaction tax.
Collateral use – As gold prices remain stable, you can forward your ETF investment as collateral if you need to borrow funds from a financial institution. Lenders usually offer loans ranging from 65% to 85% of the market value of the investment.