Gold ETF is the best option to invest in gold for the short or medium term. But if you want to invest in gold for the long term then I would recommend you invest in sovereign gold bonds.
Both gold ETFs and sovereigns track the value of the gold price and their performance is directly related to the change in the gold price. But gold ETFs are managed by fund managers and charge a management fee of up to 1%. You don’t need to pay any fee to invest in SGB.
You also get a fixed 2.5% interest annually on SGB which is missing in ETFs.
The only drawback of SGB is the lock-in period of 8 years. There is no lock-in associated with ETFs, you can buy and sell at any time during the trading period. This makes Gold ETFs a better option to invest in gold for the short or medium term.
In this post, I will take you through everything you need to know about investing in Gold ETFs in India – from the basics to the step-by-step process of investing in one.
What is Gold ETF
Gold Exchange Traded Funds (ETFs) are open-ended mutual fund schemes that track the price of gold. Gold ETFs are traded on stock exchanges like shares, and their value is directly linked to the market value of physical gold.
Gold ETFs provide you with a cost-effective, convenient, and efficient way to invest in gold without the need to hold physical gold.
How Gold ETF Works
Gold ETF works on the simple principle of tracking the market price of gold. The fund manager buys physical gold and creates units of ETF that represent a certain amount of gold. One unit of gold ETF represents 1 gram of gold and is backed by physical gold of very high purity 99.5%.
Gold ETF fund house charges an expense ratio that includes charges for storage and handling of gold, and insurance cover to protect the gold kept in vaults against calamities or disasters.
These units are then listed on the National Stock Exchange of India (NSE) and Bombay Stock Exchange Ltd. (BSE) stock exchange like a stock of any company stock for trading. You can buy or sell these units on the stock exchange during market hours. You need to buy a minimum of 1 unit (1 gram gold) of gold ETF.
When you redeem the Gold ETF, you receive the cash equivalent, not the physical gold. You can convert your gold ETF into physical gold but you need to have a minimum unit of ETF worth 1 kg of gold. This is because the standard size of one gold bar is one.
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How Return on Gold ETF Calculated
The return on Gold ETF is calculated based on the market price of gold and the expenses charged by the fund manager. The fund manager charges a management fee, which is typically between 0.5% and 1% of the asset value.
The net asset value (NAV) of the Gold ETF is calculated by deducting the expenses from the market value of gold, and the returns are calculated based on the change in NAV.
Return on Gold ETF = (Ending NAV – Beginning NAV) / Beginning NAV*100
For example, let’s say you invest in a Gold ETF with a Beginning NAV of Rs. 5000 and an Ending NAV of Rs. 5500 after one year.
Return on Gold ETF will be = (5500 – 5000) / 4,000 *100= 10%
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Benefits of Gold ETF
Access to Gold
You can invest in Gold without holding the physical gold through gold ETFs. You can buy and sell shares of a Gold ETF on an exchange, just like stocks, making it a convenient and cost-effective way to invest in gold.
Low Costs
Gold ETFs typically have lower fees compared to other forms of gold investments, such as buying physical gold or investing in gold mutual funds.
High-Liquidity
Gold ETFs are highly liquid. You can easily buy and sell on a stock exchange throughout the trading day. This allows you to enter or exit your positions in the Gold ETF quickly and easily, providing flexibility in managing your investments.
Transparency
Gold ETFs are required to disclose their holdings on a daily basis, providing transparency and visibility into the underlying assets held by the fund. This allows you to track the performance of the Gold ETF and make informed investment decisions.
Drawbacks of Gold ETF
Expense Ratio
Gold ETFs have a lower expense ratio compared to physical gold, gold mutual funds and digital gold but more than SGBs.
You don’t need to pay any fee in the SGB. The expenses charged by the fund manager can still impact the returns. You can also read how to invest in gold in India to know about other ways to invest in gold apart from gold ETFs.
Minimum Limit
You need to buy a minimum of 1 unit of Gold ETF which is about Rs 5500 to Rs 6000 which is higher than the minimum requirement of gold mutual funds and digital gold.
Lower Return than SGB
Gold ETF provides less return as compared to investment in sovereign gold bonds. Gold ETF and SGB both track the price of gold but have the difference in the return because
- Gold ETF charges an expense ratio but SGB carries no charges
- You get a fixed interest of 2.5% annually which is not provided in the Gold ETF.
Step-by-Step Process to Invest in Gold ETF
Step 1 – You need to open a Demat account to invest in Gold ETF. If you already have a Demat account then proceed to step 2. You can check the detailed comparison between Upstox vs Groww to open a demat account with low brokerage charges.
Step 2 – Login into your Demat account
Step 3 – Search for the Gold ETF in which you want to invest. You can place a buy order during market hours, and the units will be credited to your Demat account upon purchase.
Step 4 – Enter the units in that you want to invest.
Step 5 – Click on “Buy”. Your order will be placed. You will receive the gold ETF in your holding section.
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How to Sell Gold ETF
Step 1 – Login into your Demat Account
Step 2 – Go to your holdings
Step 3 – Select the gold ETF that you want to sell
Step 4 – Click on the exit option
Step 5 – Enter the units that you want to sell. Click on “Sell” and then click on ‘confirm order’.
Tax Implications on Gold ETF in India
Gold ETFs are treated as non-equity mutual funds for tax purposes.
- Short-term Capital Gains Tax: If you sell your Gold ETF units within three years of purchase, the gains will be treated as short-term capital gains. You will need to pay a 15% tax on your short-term capital gains.
- Long-term Capital Gains Tax: If you redeem your gold ETF after 3 year of purchase, the gains are considered long-term capital gains (LTCG). Long-term capital gain amount of up to INR 1 lakh is tax-deductible, and a tax of 10% would be levied on amounts greater than 1 lakh.
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Best Alternative to Gold ETF to Invest in Gold
The best alternative to Gold ETF is sovereign gold bonds because of the higher returns. You can invest in other gold investments like physical gold, Gold Mutual Funds, and digital gold.
Let’s compare all the options –
| Physical Gold | SGB | Gold ETF | Gold MF | Digital Gold | |
| Investment limits | Min – No Max – No | Min – 1 gram Max – 4 kg | Min – 1 gram Max – No | Min – Rs 1000 Max – No | Min – No Max – No |
| Cost | Making charges | No | Upto 1% | Upto 2.5% | Upto 3% |
| Lock in period | No | 8 years | No | No | No |
| Returns | Gold returns – making charges | 2.5% p.a + Gold returns | Gold returns – cost | Performance of the underlying asset – cost | Gold performance – cost |
| Tradability | No | Tradable on Exchange | Tradable on Exchange | Tradable on Exchange | No |
You can also go through the best investment options to invest your salary in India article, to understand what other ways are to diversify your portfolio.
Conclusion
You should invest a maximum of 10% to 15% of your investment portfolio in all kinds of gold investments including gold jewelry, coins, and SGB.
SGB is my favorite because of the higher return but 8 year lock-in period can be a concern for you. If you want to invest in gold for a shorter period of time then gold ETFs are the best option.
You can diversify your rest portfolio with stocks and mutual funds for better overall returns on your investments.
If you have any doubts, let me know in the comments.
FAQs
The alternative investment options to a Gold ETF include physical gold, Sovereign Gold Bonds, gold mutual funds, and digital gold.
The NAV (Net Asset Value) of a Gold ETF is calculated by dividing the total value of the ETF’s assets by the total number of units outstanding.
Yes, investing in a Gold ETF can act as a hedge against inflation, as gold prices tend to rise during inflationary periods.
Gains from investing in a Gold ETF are taxed as per the holding period. If the units are sold before 3 years, gains are taxed as short-term capital gains, and if sold after 3 years, gains are taxed as long-term capital gains.
15% tax is applicable on STCG and 20% on the LTCG.
Yes, Gold ETFs can be bought and sold during market hours like other securities.
The minimum investment amount for a Gold ETF is 1 unit which is equivalent to 1 gram of gold.
Yes, some ETF issuers offer a SIP (systematic investment plan) facility for investing in Gold ETFs.
The expense ratio of a Gold ETF is the annual fee charged by the ETF issuer to manage the ETF. It can range from 0.1% to 1%.
The return on a Gold ETF is calculated based on the change in the price of gold and the expenses incurred by the ETF issuer.
