Gold ETFs In India: What You Should Know?

Even though the price of gold has been on a cyclical downward trend since September 2011, Gold ETFs in India has been existed for more than ten years but have yet to take off significantly. The Indian Gold ETF market is minuscule in comparison to the global ETF market in terms of size. Slowly and steadily many investors are getting intrigued by this instrument. Read ahead to learn more.

 What are Gold ETFs?

Gold Exchange Traded Funds (ETFs) bring together the benefits of gold investments and stock trading. The investments made in gold bullion and gold ETFs are depending on the value of gold. Trading in gold ETFs is done through brokerages, who will purchase gold at market prices using the money you provide them to invest. At the amount you paid for it, one unit of gold ETF is equivalent to one gram of gold. Similar to business stock, these entities are traded and bought on the cash market of stock exchanges.

 How to invest in Gold ETFs? 

You need two things, in particular, to start investing in gold ETFs: 

• Choose a gold ETF product or fund manager among the many banks and other private financial institutions that provide gold ETF products. Your ETF fund manager or advisor will function as a stockbroker on the NSE once you've selected a product and purchased and sell the gold on your behalf. This procedure is similar to trading in equities and shares.
• To trade in gold ETFs, which are sold and bought in electronic, dematerialized form rather than in physical form, you must have a DEMAT account. Either your chosen ETF fund manager or your stock broker can help you open a DEMAT account.

 Investors wishing to diversify their portfolios with access to the gold market might consider gold ETFs. It is a minimal-risk investment that is appropriate for cautious investors. The invested funds are used to purchase 99.5% pure standard gold bullion. Even though they are traded on stock exchanges, gold ETFs are a low-risk investment. People can choose gold ETFs if they do not want to pay money for storage or additional taxes, as is the case with actual gold.

 Pros of Gold ETFs

Following are some of the plus points of investing in gold ETFs: 

• High Flexibility: You can buy gold ETFs online and deposit them in your Demat account. They are traded on a stock exchange by the asset management company (AMC). That is, you can come and go as needed. Gold ETFs behave just like real gold, even in the Demat format.
• Small Denomination: You will require a sizable sum of money to buy gold when you go up to a shop. With gold ETFs, on the other hand, you have the option of choosing the quantity you want to buy and sell.
• Liquidity: Because they can be exchanged on the stock exchange at the going rate during a trading session, gold ETFs have great liquidity. Additionally, compared to actual gold, transactional costs (such as broker fees and government taxes) are lower.
• Transparency: Investors can access the transparent, successful, and secure gold market through gold exchange-traded funds (ETFs). Additionally, they have a lot of liquidity because gold can be exchanged rapidly and easily.
• Hold For Long Term: Unlike real gold, gold ETFs are not subject to a wealth tax. Safety and storage (in a Demat account) are also no problems. As a result, you are free to keep your ETFs for as much as you like.

 Cons of Gold ETFs 

 Following are some of the drawbacks of investing in Gold ETFs: 

• Counterparty Risk: ETFs, which are financial products with counterparty risk, are not actual assets like physical gold bullion, which is what they are. When there is a chance that one party to an agreement may not fulfill their responsibilities, this is known as counterparty risk.
• No Access To Gold: It may come as a shock to you to find that gold ETFs don't give investors exposure to the metal, but it's true. A gold ETF investment entails purchasing shares of the Trustee. In essence, you are a trusted shareholder rather than a gold bearer. This defeats one of the main benefits of owning it—protection in times of need. The Trustee will pay your claims in cash, not gold if the banking system as a whole collapsed along with the economy. The ultimate irony is that the collapse of the ETFs could occur at the same time as the price of gold rising.

     Conclusion 

For a cautious investor, gold ETFs can be an excellent investment choice. It is a low-risk investment, and a portion of your portfolio allocated to gold may help long-term inflation mitigation. Your gold ETF holdings may be used as security for a personal loan from either a bank or another financial institution. It has the benefit of being more practical than conventional hypothecation because it is in digital form with transparent price and other details.