What Is Gold ETF?
You must have come across gold ETFs traded on the stock exchanges. Globally gold ETFs are huge and are just about catching on in India. Gold ETFs are like a gold mutual fund, the only difference being that the gold ETF is traded on the stock exchange like any other stock and you can hold it in your demat account like any other stock.
Unlike mutual fund AMCs that offer purchase and redemption of the mutual fund schemes, the AMC does not offer buying and selling in Exchange Traded Funds (ETFs). It is a market determined demand and supply and you can buy ETFs or sell ETFs of gold in the market if there is supply / demand for the same. Here are some interesting aspects of gold ETFs you must be familiar with.
Is buying Gold ETFs the same as buying gold?
There are different ways to invest in gold. You can buy physical gold in the form of bars, coins or jewellery. Alternatively, you can buy the sovereign gold bonds issued by the government and sold by the RBI through various banks. The third method is to invest in e-gold that is issued by commodity exchanges or even put your money in gold futures. Gold ETF is an electronic method of buying gold as Gold ETFs can be held in your regular demat account and can be bought and sold like any stock. Gold ETFs are also liquid.
When i buy Gold ETFs, when is the units credited to my account?
As stated earlier, you can buy and sell gold ETFs in the stock market just like any other stock. You can use your existing trading account to place buy and sell orders on gold ETFs and you can also use your existing demat account to hold these units. When you buy gold ETFs, the equivalent units will get credited to your demat account on T+2 days. Similarly, when you sell gold ETFs, the amount will be credited to your bank account by the end of T+2 day.
Will the aum of the fund move with buying and selling of GOLD ETF?
No the AUM of the fund will not be impacted. Remember, the mutual fund AMC is not issuing fresh units or redeeming existing units. Hence the AUM is not impacted in any way. It is just a transfer of ownership. When you buy units of a mutual fund scheme from the AMC, the AUM of the fund increases and when you redeem units the AUM of the fund reduces. In case of ETF, there is only transfer of ownership from seller to buyer and the ETF AUM does not get impacted in any way.
If GOLD ETF are just paper, is there no gold behind it?
That is an excellent question. The answer is that gold ETFs are fully backed by equivalent physical gold which his normally held with a custodian bank. So, in case you are worried about what happens to your money, remember gold ETFs are regulated by SEBI and every unit is backed by physical gold. Gold funds tend to keep their physical gold in custody with a bank custodian and the most popular such custodian for gold ETFs in India is the Bank of Nova Scotia. In other words, every unit of gold ETF is secured by equivalent physical gold.
How is the price of the GOLD ETF determined in the market?
Like any stock in the market, the price of gold ETF is also impacted by demand and supply However, being a passive ETF, has to be benchmarked to an underlying asset. In this case, it is 24 carat gold price. So, the gold ETF price will also vary with the price of physical gold. That means, there is a price risk in gold ETFs just as there is price risk in gold. If price of gold goes up then the price of the gold ETF also goes up and the reverse also holds true. Gold ETFs are almost like a mirror of physical gold. Normally, these gold ETFs operate units in fractions of 1 gram each.
Can I diversify my equity fund risk with GOLD ETF?
You absolutely can and that is one of the major ideas behind investing in gold ETFs. Gold and equity normally have a very low correlation or at times they even have negative correlation and move contrary to each other. When you include gold in your portfolio via gold ETFs, it acts as a hedge against the vagaries of the macroeconomic risks and stock market volatility. Normally, when equities tend to underperform, gold ETFs tend to do much better.
Is it true that GOLD ETF works best in times of uncertainty?
That is obvious because gold is seen as a safe haven investment that gives you protection against uncertainty in the market. This is something that you will get to see time and again. Gold prices tend to increase in times of economic and geopolitical uncertainty. During the financial crisis of 2008 and 2009, gold was the best performing asset. Gold also did very well between 2018 and 2020 when Iran sanctions, US-China trade war and COVID were the big risks. Gold is a good hedge in times of elevated global uncertainty.
When i invest in GOLD ETF is there capital gains tax?
Gold ETFs are subjected to capital gains tax when it is redeemed, assuming that you make a profit over your purchase price. Gold ETFs are treated as non-equity assets and hence their definition of short term will be 3 years instead of 1 year. Also, long term capital gains or LTCG will continue to be taxed at 20% after considering the benefit of indexation. In the case of short term gains, the gains will be included in your total income and tax will be levied at the peak rate tax applicable to you.
Will the broker charge me STT on the GOLD ETF transaction?
Gold ETFs are not required to pay Securities Transaction Tax (STT). That is because STT is only imposed by default on equity and equity products. Gold ETFs are explicitly classified as non-equity products, and so they do not attract STT. That actually improves the redemption yield on gold ETFs.
Would GOLD ETF be classified as an investment or just a hedge?
This is the most important aspect you need to understand about gold ETFs. They are not investments in the strict sense of the term like equity or debt and hence may not be in a position to create value over a period of time. They are hedges or protection against uncertainty. That means they are meant to protect value in times of political and economic stress when other asset values are facing pressure. Negative correlation with equities are helpful here.
Gold ETFs are an asset class that can give protection to your portfolio. An allocation of 10-15% overall to gold is a good idea.