What are Gold ETFs?

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Gold has huge cultural significance in India from time immemorial. Gold is not only purchased duirng auspicious occasions like Akshaya Tritiya, Dhanteras, Deepawali, weddings etc., it also has tremendous economic significance.

Gold is supposed to retain its purchasing power and can be used as a hedge against inflation in the long term. Over the past 20 years, gold has given over 12% annualized returns (Source: Goldprice.org) which is higher than risk free fixed income investments over the same period. Gold can also be used as a diversification tool because historically gold prices have negative correlation with equities.

Investors buy gold in physical form either as jewellery, bars and coins. While buying gold jewellery is the traditional form of gold purchase, it involves making charges and risk of impurities.

A safer and efficient way of investing in gold is through Gold Exchanged Traded Funds or Gold ETFs. Gold can also be bought through mutual funds popularly known as Gold funds. Gold funds are fund-of-fund mutual fund schemes.

Gold ETFs can be bought or sold in stock exchanges like shares of a company and you should have a demat and trading account. Gold ETFs tracks the market price of gold and has the same value as pure 24 carat physical gold. Investors have to pay brokerage and other transaction costs to transact in Gold ETFs. Gold ETF will also include the fund management fees over the investment period. These costs notwithstanding, Gold ETF is a cheaper, safer and convenient way of investing in gold.

There are several advantages of investing in Gold Exchange Traded Funds as opposed to physical gold –

  1. By the time children are old enough to get married, the jewellery design may be out of fashion. In order to make new jewellery, the jeweller will deduct the impurities from the value of gold. You will have to pay making charges also for the new jewellery.
  • A better option for parents is to invest in Gold ETFs. At the time of the child’s marriage, parents can sell the Gold ETF at the prevailing market price of gold andbuyjewelleries. Gold ETFs are cheaper than physical gold because there are no making and storage charges. 
  • Over a long tenure Gold has given more returns than fixed income investments while beating the inflation. Gold as an asset class as give over 12% annualized returns and over 886% absolute return in the last 20 years (source: Goldprice.org)
  • Gold ETFs has given 13-14% annualized return in the last 3 years and over 8% in the last 5 years (source: www.advisorkhoj.com) which is higher than FD and PPF returns during the same period.
  • If you want to invest in gold, invest in ETF to beat inflation and fixed income returns over the long term. Gold Exchange Traded Funds are excellent instruments for investing in Gold. If you do not have demat/ trading account then you can buy Gold mutual fund schemes offered by mutual fund companies in India.