Gold ETFs: Features and Benefits, Investment Process & Tax Efficiency

Investing in gold ETFs has several benefits, including higher liquidity, lower risk, tax efficiency, and ease of access to a commodity like gold. 

Buying physical gold is one of the most popular investment choices in India. However, purchasing, storing, and selling gold comes with certain challenges. Investors looking to diversify their portfolio with gold can alternatively consider investing in gold ETFs.

These ETFs have several advantages over purchasing physical gold, such as higher liquidity, no storage problems, and higher transaction transparency. Read on to learn more about the features, benefits and tax implications of investing in Gold ETFs. 

What is a Gold ETF?

A Gold Exchange Traded Fund, or Gold ETF in short, is a unique cross between a stock and a mutual fund. This is an open-ended mutual fund whose stock price fluctuates in real time on stock exchange which is similar to pricing of physical gold. Gold ETFs can be bought and sold on the stock market, unlike mutual funds. On the other hand, mutual funds can only be purchased or redeemed at the end of each trading day based on their Net Asset Value (NAV).

Gold ETFs, meaning those ETFs that trade in the commodity gold, unlike direct investments in physical gold, offer investors the benefit of capitalising on market opportunities in real time. Simultaneously, they also allow investors to invest in one of the most sought-after, coveted commodities: gold.

Features & Benefits of Gold ETFs

As a retail investor with an average risk appetite, you may consider having 10 to 20% of your total portfolio value invested in Gold. The advantages and features of Gold ETFs in India make them an attractive investment option. Today, most major Asset Management Companies (AMCs) offer this product.

Hence, there are a vast number of products to choose from. The fund houses purchase physical gold as bars with a minimum of 99.5% purity, and a vaulting agency is chosen to hold the gold physically in a secure vault. The onus of keeping physical gold safe is not on the investor. Here are some of the key features and benefits of investing in Gold ETFs: 

Flexibility

One of the major advantages of Gold ETF investments is the flexibility that this instrument offers. Often referred to as paper gold, Gold ETFs in India can be purchased and sold like shares on the stock market exchange via your Demat account. Unlike physical gold, these ETFs do not come with any storage demands.

The value of gold ETFs depends on actual gold prices and fluctuates accordingly. You can choose to start investing with a small amount and grow your investment over time. You can also liquidate your investment on demand. The minimum investment in gold ETFs is the prevailing cash amount approximately equal to 0.01 gram of physical gold to 1 gram of physical gold.

Liquidity

Unlike several other investment instruments, there is no lock-in period for Gold ETFs that come with higher liquidity. This gives them an edge over other investment instruments such as fixed deposits, bonds, and other saving schemes. Also, it takes longer to sell physical gold, as one needs to identify a credible buyer and negotiate the right price. 

Ease of Participation in the Gold Market

Most investors are looking for opportunities to participate in the gold market. Traditionally, investors would hold some form of physical gold, be it jewellery, coins or bars. The key challenge with this approach is identifying credible jewellers or other gold establishments to purchase from. The authenticity of the gold itself needs to be verified. And once done, a proper storage area must be identified, be it a bank locker or a personal safe, both of which come at a cost. Physical gold jewellery also has high making charges. Selling gold also requires research and authenticating the credibility of the buyers, not to mention getting a fair price for the gold. All these issues are eliminated with the Gold ETF funds that come with a highly transparent and digitised process.  

Smaller Denomination

Another great benefit of investing in gold ETFs is that you don’t need to invest large sums of money to start diversifying your portfolio. Investors can start small by purchasing just 1 unit of gold (equivalent to 0.01 gram to 1 gram of gold). The minimum investment amount gives it an edge over physical gold, which demands a much higher investment. Gold BeES are available in 0.01 gram of gold on stock exchanges.

Tax Efficiency

Profits earned on gold ETFs after holding onto them for three years are taxed as Long-term capital gains (LTCG) at 20% with indexation benefits. On the other hand, if you sell gold ETFs before three years, the profits will be added to your overall income and taxed as per your current income slab rate. No additional taxes are applicable, such as sales tax or wealth tax.

However, with recent changes in Budget 2023 above taxation has changed for investor buying on or after 01st April 2023:

All the gains now will be classified as short term capital gains and taxation will be as per your applicable tax slab.

On the other hand, when selling physical gold (after holding it for three years), the profit earned is taxed as Long Term Capital Gain at 20% with indexation benefit (plus cess). Short Term Capital Gains (on selling physical gold in less than three years) are added to your total income and taxed as per your income bracket. Moreover, you also have to pay a GST of 3% when buying physical gold.

Ease of Transaction

Unlike the purchase and selling of physical gold, it is extremely simple to purchase and sell Gold ETFs. You just need to log in to your Demat account and buy or sell Gold ETFs when you think the price is right. There is no exit or entry load, unlike mutual funds. You need not wait for the Net Asset Value (NAV) of the day to be declared, like mutual funds. These days, many investors make such transactions from their mobile phones, giving them the benefit of timely capitalisation on market opportunities.

Portfolio Diversification

Financial experts always recommend having a diverse and balanced investment portfolio of equity, debt, and evergreen commodities such as gold. Assuming that you are a retail investor with an average risk appetite, the thumb rule for gold investments is to have between 5 to 20% of your investment portfolio dedicated to this category. Gold ETF funds are a good bet for diversification due to the various benefits they offer, such as higher liquidity, ease of transaction, low cost, and low risk. 

Low Risk

Gold is one of the most stable commodities that holds its value. While the stock market can be volatile, downward spirals also impact the NAV of mutual funds. On the other hand, Gold ETFs are dependent upon the actual price of gold. Hence, it is considered a low-risk, stable investment. 

Who Should Invest in Gold ETFs?

Gold ETFs are a product that is relevant to a wide spectrum of investors: 

• Gold ETFs are a solid investment for investors with an equity-heavy portfolio looking to balance the risk with a stable, low-risk, cost-effective, gold-based asset. 
• Gold ETFs are also a great investment for those looking to invest in gold without having to bear the costs of making and storage charges, as well as the other additional hassles of transacting in physical gold.
• Investors who want to get started with a small investment amount or those who are just starting their investment journey will also find gold ETFs helpful. 
• Senior citizens looking to park their wealth in a relatively less risky asset can also look at diversifying into Gold ETFs.

How to Invest in Gold ETFs?

The first step is to open a Demat account, which allows you to buy and sell a large spectrum of investment assets, including Gold ETFs. Choose the broker of your choice after evaluating all the applicable fees and charges. You will need to furnish some basic KYC documents such as Aadhaar Card and PAN for opening your Demat account.

You must do your due diligence before investing in a Gold ETF. Once you have decided which Gold ETF to invest in, you can directly purchase it through your Demat account. A percentage will go towards brokerage charges. You will get an email confirmation and be able to track the performance of your Gold ETF in real time.  

Tips on Investing in a Gold ETF

• Do not invest over 20% of your portfolio in Gold ETFs. This asset is about diversification, not long-term wealth creation. 
• You should ideally have a well-planned overall investment strategy before you start investing in Gold ETFs. 

Bottom Line

Historical data suggests equity markets are always susceptible to external events and can be volatile. With increasing financial awareness, investors are considering investing in gold to balance their higher-risk portfolios with an evergreen asset class such as gold. However, instead of limiting one’s options to investing in physical gold, which can be a cumbersome process and also much more expensive, one can consider investing in Gold ETFs. Accompanied by benefits such as ease of transaction, cost-effectiveness, low risk, higher liquidity, and ease of access, Gold ETFs are emerging as a preferred investment instrument for a wide spectrum of investors. When choosing to invest in the top gold ETFs in India, ensure that you do your research and only then make a purchase.

FAQs about Gold ETFs