Indians’ love for gold is no secret. For long it has been one of our go-to investment product. While owning gold in physical forms like jewellery, gold coins or bars comes at a huge cost, owning it in paper form like gold exchange traded funds (gold ETFs) comes at a price closer to the actual price of gold. The price difference between the two, i.e., physical and paper gold, is due to the making charges, storing costs, jeweller margin etc, which is not there in the latter.
Therefore, if your objective is to bank on the value of gold increasing in future, investing via the ETF route is the answer. Similar to mutual funds where the value of one’s investment is a reflection of the value of underlying securities (equity or debt), in gold ETF, gold is the underlying asset.
What is gold ETF?
The gold ETF being an exchange-traded fund can be bought and sold only on stock exchanges thus saving you the trouble of keeping physical gold. What’s more, unlike with jewellery, coins and bars which come with high initial buying and selling charges, the gold ETF costs much lower. The transparency in pricing is another advantage. The price at which it is bought is probably the closest to the actual price of gold, and therefore, the benchmark is the physical gold price.
How to invest in gold ETFs
Gold ETFs trade on the cash market of the National Stock Exchange, like any other company stock, and can be bought and sold continuously at market prices. What you need is a trading account with a share broker and a demat account. One may either buy in lump sum or even at regular intervals through systematic investment plans (SIP). What’s more, you may even buy 1 gram of gold. Create a plan to invest systematically rather than trying to time the market.
Even though there are no entry or exit charges in gold ETF, there are three costs associated with them. One, is the expense ratio (for managing the fund) which is generally lower compared to other mutual funds and is around 1 percent. Second, is the broker cost that needs to be accounted for every time you buy or sell units. Third, which technically is not a charge but impacts returns is the tracking error. It arises because of the fund’s expenses and cash holdings thus not mirroring actual gold prices.