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Exchange Traded Funds (ETFs) are instruments that are listed on a stock exchange and that represent and ownership in an underlying security,commodity or asset. A gold ETF is an instrument that represents an ownership of gold assets. When you buy a gold ETF,you get a contract indicating your ownership in gold equivalent to the rupee amount of your investment. Each unit of gold in the fund that you can buy is equal to 1 gram of gold.

In order to buy a gold ETF,you will need to have a demat account to hold your ETF units and a share trading account with a registered broker to trade your units. When you want to sell your ETF,all you have to do is to put in a sell order and you get the then prevailing price as trading on the exchange. Fund management companies that sell gold ETFs are heavily regulated,so you don’t need to worry about buying an investment in gold without getting delivery of the metal. While you will face the risk of a rise or fall in gold prices,you should feel totally secure about holding gold in ETF form. In fact,the ETF is expected to buy and have in storage matching amount of gold for the amount of money that investors have put into the ETF. This gold is held on your behalf at an appointed custodian for the ETF.

What are benefits of investing in a gold ETF?

* Pricing transparency: If you buy gold from a jeweller,you will never be sure if the price is a right. In fact,different jewellers might price the same item differently. Compared to this,ETFs have a very transparent pricing mechanism. The price reported on the stock market is the final price you have to pay (transaction costs,like those in stock trading,will be the only additional cost). The price listed on the exchange directly tracks the price of gold in the international market. So,you can be sure that when you buy or sell gold through ETFs,you would be getting the existing price at that point in time.

* Purity: If you own a gold ETF,you don’t have to worry about purity as the gold held against the money you have invested in the ETF will be of the highest purity. The custodian will certify that the purity is 995 or above.

* No risk of storage: If you own physical gold,you are always going to be worried if its stored safely,away from anyone who could potentially run away with it. With a gold ETF you don’t have this worry.

What are the disadvantages of a gold ETF?

* No physical asset: For someone who needs to own physical gold,holding an ETF might not be suitable.

* Transaction costs and annual charges: Investors have to bear the stock brokerage charges as well as other statutory levies as applicable. While there are no entry and exit loads when investing in a gold ETF,investors might also have to bear some annual recurring expenses as stipulated by the regulations. There are no such expenses if one owns physical gold.

* Tracking error: A gold ETF attempts to track as closely as possible the price of gold in the international markets. However,sometimes this results in a tracking error where the price of the ETF might not be 100% the same as the spot price of gold. Ultimately,you lose out as an investor if the tracking error is very high.

What are the tax implications of investing in a gold ETF?

Like physical gold,investment in a gold ETF is also treated like investment in any capital asset.. A gold ETF is treated like a debt mutual fund. If you sell your ETF before one year,you will taxed as per the income tax slab that you fall in. If you sell after one year,long-term capital gains of 20% will apply. Unlike owning gold in physical form,holding a gold ETF does not attract wealth tax.

How easy is it to sell a gold ETF?

A gold ETF has higher liquidity compared to physical gold. The process of selling a gold ETF is faster than selling physical gold because the moment you decide to sell,you can sell and you don’t have to wait to find the best prices. The price you will get for selling your gold ETF will generally be closer to the market price of gold. You don’t have to suffer the embarrassment of having to sell your jewellery.

* iTrust Financial Advisors Private Ltd