Gold the evergreen asset is once again being sought as a safe haven by people and governments alike in the face of the recent global economic turbulence. Holding gold in its physical form has many drawbacks that are making alternatives like gold mutual funds, gold ETFs, etc popular. Gold Exchange Traded Funds are open-ended gold funds listed on stock exchanges. They try to track the price of physical gold. Each unit of the fund purchased corresponds to approximately 1 gram of gold. Like shares they can be bought and sold on the exchange.
We shall give some insight on how gold ETF works. During the New Fund Offer (NFO) the fund house purchases physical gold from authorized participants for the money that has been collected from investors. The fund’s custodian keeps stock of the physical gold. As the price of gold changes through the day the value of ETF units also changes. You can buy units in the demat form.
There are 14 Gold ETFs listed on NSE and/or BSE.
If all gold ETFs attempt to track the price of gold why do they differ in prices? The difference can be attributed to expense ratios of the funds. Expense ratio is the percentage of operating and management charges paid to the AMC. Bigger the expense ratio, lesser will be your returns. This will be more significant in long term investment due to the effect of compounding. Apart from this the portfolio of funds may also differ. The funds may invest a small portion in cash and money market instruments.
What ETFs Are
1. Exchange Traded Funds are open ended mutual funds. They’re different from others because they listed on stock exchanges.
2. They can be bought and sold like shares on the exchange and their NAVs change intra-day unlike mutual fund whose NAV applicable for selling or buying is the previous day’s NAV.
Open a Demat Account
1. If you do not have one already you need to open a demat account with a DP. A demat account holds your physical securities in the electronic form.
2. For Gold ETFs you will need a demat account and a trading account. Gold ETF is considered non-equity and a trading account is necessary for dealing in non-equity securities in the stock exchange. Most providers’ offer both accounts but you can choose different providers for both.
3. There is annual maintenance charge (a few hundred rupees every year), transaction charge (0.02% – 0.06%), one time account opening charge and so on associated with the accounts.
4. Your demat account and trading account is linked to your bank account for transaction purpose and some banks may offer a 3-in-1 account of bank account, demat and trading account with a DP.
Buying and Selling ETF units
1. Once your demat account and trading account are ready, you can log in to your online trading account and look up the ETFs listed in NSE or BSE.
2. Check price and buy units. Your demat account will show the units in 3-7 days after making payment. Similarly while selling if you get a higher price you can sell the units and the transaction will be effected in a few days time.
3. Gold ETF units represent approximately 1 gram of gold or ½ gram in case of Quantum Gold ETF. Since these ETFs all track the price of gold their prices will be close. Choose the one with the lowest expense ratio and highest trading volume.
4. Selling units before one year will make you liable to pay short term capital gains tax which is always higher than long term capital gains tax.