Gold has reached historic peaks and is beyond the reach of many. One option available, however, is paper gold. Because of the uncertainty arising due to the political unrest in West Asia, rising global inflation and interest rates, gold is a safe investment option.
For small investors, it makes sense to invest in a gold exchange-traded fund (ETF). Gold ETFs invest in physical gold. The funds track the price of gold. The ETF route saves the investor from purchasing and keeping gold. You can buy and sell gold on stock exchanges at the wholesale price with good liquidity. Each unit of a gold ETF represents one gram of gold. You need to have a demat account to invest in a gold ETF.
Gold ETFs provide investors with a means of participating in the gold bullion market without taking physical delivery of gold, and to buy and sell that participation through the trading of a security on the stock exchange. A gold ETF is a passive investment. So, when the gold price moves up, the ETF appreciates and when it moves down, the ETF loses value.
A gold ETF tracks the performance of the gold bullion. It provides returns that, before expenses, closely correspond to the returns provided by physical gold. Each unit is approximately equal to the price of one gram of gold.
There are several advantages of investing in gold ETFs. Owning physical gold is subject to many risks - quality and physical storage. It is also a heavy investment. Gold ETF units can be exchanged either for the cash equivalent at the ruling price of the unit which normally keeps pace with and reflects the ruling gold price or simply for the underlying asset - gold. Gold ETFs also guarantee purity of gold.
Also known as paper gold, these ETFs are convenient and inexpensive alternatives to owning physical gold. Unlike physical gold, they are held in demat or electronic form and can be traded on a stock exchange just like buying and selling stocks.
Gold ETFs eliminate the drawbacks of physical gold (for example, risk of impurity), are more tax-efficient, and allow you to invest with small amounts.
The returns from all gold ETFs schemes are almost the same, and more or less similar to physical gold, because they are passively-managed funds and track the performance and yield of gold in the spot market closely. They hold physical gold on behalf of investors.
Gold ETFs schemes are treated like non-equity mutual funds for the purpose of tax. So, the gains attract short-term capital gains tax if held for less than one year and long term capital gains tax if the period of holding is more than a year.
When you buy gold ETFs, though you own a certain amount of gold, you don't actually get delivery of the yellow metal. You can store the units virtually in your demat account. Gold ETFs are available in small denominations and you don't need to have a large amount of cash to invest in gold anymore.
Physical gold attracts wealth tax if you are holding more than a certain amount. But there is no such tax on gold held through gold ETFs.
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