How To Invest In Gold Through ETF: Investing in a Gold Exchange Traded Fund (ETF) can give you better returns than investing in physical gold. The frequent crashes in the stock market have made people even more interested in gold. Now that even Fixed Deposits aren’t giving great returns, many have started diversifying their portfolio by investing in gold. Want to know how? Read on.
What is Exchange-Traded Fund?
Loading the player... DEFINITION of 'Exchange-Traded Fund (ETF)' An ETF, or exchange-traded fund, is a marketable security that tracks an index, a commodity, bonds, or a basket of assets like an index fund. Unlike mutual funds, an ETF trades like a common stock on a stock exchange. ETFs experience price changes throughout the day as they are bought and sold. ETFs typically have higher daily liquidity and lower fees than mutual fund shares, making them an attractive alternative for individual investors.
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What is Gold ETF?
Gold ETF is an ETF that tracks physical gold prices. The first gold ETF in India was launched by benchmark Mutual Fund in 2007. One unit of gold ETF is usually equal to a gram of gold. These ETFs are backed by physical gold of the highest purity. Gold ETFs were launched in India only a decade back. Unlike a Mutual Fund, an ETF will be listed on stock exchanges and are traded like stocks. Using a gold ETF, you can easily invest in gold in small amounts at different price levels to ensure higher returns. Presently, there are 14 gold ETFs in India. While for some of them, one unit is equal to one gram of gold, for others, one unit is equal to half a gram of gold. For instance, if you invest in an ETF where 1 unit is equal to 1 gram of gold, the units will be allotted in such a way that the value of each unit you buy corresponds to one gram of gold. So, if you invest Rs. 27,000, when the price of 10 gram of gold is Rs. 30,000, you will be allotted nine units. You need to check the unit value before investing.
The difference
Ideally, all gold ETFs where the unit of gold is the same should have the same NAV. However, NAVs do differ slightly. Why? This is because a gold ETF will not only buy gold it will also invest in some other assets like bonds and Government securities. Sometimes the ETF also holds cash in order to buy gold at lower prices. This is why the NAVs of different funds are different. Another point is the expenses incurred by the ETF. When the fund buys and sells gold on your behalf, they need to pay a number of charges such as brokerage fees, Value Added Tax (VAT), custodian charges, among others.
Depending on the accounting policies of the Mutual Fund house, the NAV of the fund will be adjusted for these expenses on a daily basis. Note that you pay fund management charges for investing in the fund. This is the reason why the NAV of the funds differs. For example, the NAV of Birla Sun Life Gold ETF stands at Rs. 2,783 while that of IDBI gold ETF is Rs. 2,790. Note that, usually, these differences in NAV are minimal if the funds have the same unit value. So, there won’t actually be much difference in the returns generated by them.
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How does it work?
Gold ETFs are funds that are managed passively and their returns will closely follow that of physical gold in the market. For redeeming your units, you can approach either the Mutual Fund house or the stock exchange.
Note that the Net Asset Value (NAV) of each of these funds will be different. Now, why is that?
