How to invest in gold ETF?

In India, gold is often seen as a ‘golden investment opportunity.’ Investing in gold can yield good returns and help you diversify your portfolio. However, not everyone wants to purchase physical gold because it requires safekeeping, comes with add-on charges like making charges for gold jewellery, and raises concerns about the metal’s purity.

So, what can an investor do in such situations? Well, don’t worry. You can still diversify your portfolio by investing in gold ETFs in India.

Here is our complete roadmap on how to invest in gold ETFs. Keep reading to learn what a gold ETF is, how gold ETFs work, how to invest in gold online in India, and more.

Gold ETF Meaning

A Gold Exchange-Traded Fund (ETF) is an investment that follows gold prices and is traded on the stock exchange like stocks. Unlike mutual funds or gold bonds, it represents ownership in paper form rather than physical gold.

Investors buy units of gold ETFs, which are backed by physical gold, but they do not own the metal itself. When sold, these units are converted into cash at market value.

In India, gold ETFs are regulated by SEBI, ensuring transparency and security. This allows investors to gain exposure to gold without the hassle of storing it physically.

Things You Must Keep in Mind While Investing in a Gold ETF in India

Now that you know how gold ETFs work, here are some things you should remember before investing in gold ETFs.

1.     Align gold ETFs with your financial goals

Gold is not ideal for long-term wealth creation, as average returns hover around 10% per year. If you’re investing in gold ETFs, it should be for short- or medium-term goals.

2.    Look beyond just fees

While gold ETFs come with brokerage and commission fees of 0.5% to 1%, don’t choose a fund based solely on lower charges. Check its past 10-year performance to see how well fund managers have handled investments.

3.    Gold ETFs are for active investors

If you plan to invest large amounts and trade frequently, gold ETFs can be a smart choice. However, if you’re looking for passive, long-term growth, other investment options may suit you better.

4.    Avoid overexposure to gold

Investing too much in gold ETFs can limit diversification. Keep your gold investments within 5% to 10% of your total portfolio to maintain a balanced financial strategy.

How to Buy a Gold ETF in India?

Here’s the step-by-step process on how to invest in gold ETFs:

1. Start by opening an online trading and Demat account with a stockbroker. These accounts are a must-have to invest in gold ETFs. You can skip this step if you already have the accounts.
2. Log in to your account on the broker’s online trading platform using your Login ID and password.
3. Select your preferred gold ETF for investment. You can opt for Systematic Investment Plans (SIPs) or buy all at once. You can also choose gold mutual funds that invest in gold ETFs and gold-related instruments.
4. Enter the number of units you want to buy and confirm the order.
5. Receive a confirmation message on your registered mobile number or email address.
6. A small fee will be debited from your linked savings account for the purchase transaction.

Benefits of Investing in Gold ETF funds

There are several advantages of investing in gold ETFs over buying and storing physical gold. Here are a few reasons why you should make the investment choice.

1.     Convenience and safety

Gold ETFs allow you to invest in gold without encountering the challenges of storage, theft, or purity. Investors can buy and sell units on stock exchanges just like shares. As a result, they are far more convenient than holding physical gold.

2.     Transparency and liquidity

The value of Gold ETFs is directly linked to live market prices of gold, ensuring transparency. Their listing on exchanges provides high liquidity, allowing easy entry and exit whenever needed.

3.    Tax benefits

While you are liable to pay capital gains tax on gold ETFs, you do not need to pay Value Added Tax (VAT) and Securities Transaction Tax (STT). Investors also benefit from indexation, which helps reduce tax liability, making them more attractive for long-term wealth creation.

4.     Low cost and no hidden charges

Unlike physical gold, investors avoid making charges, storage fees, or insurance costs. Gold ETFs only carry a small expense ratio and have no entry or exit loads, making them highly cost-efficient.

5.     Minimal market risk

Gold ETFs track the price of gold and are less volatile compared to equities. This reduces exposure to sharp market fluctuations, offering a more stable investment option.

Disadvantages of Investing in Gold ETFs

These funds are subject to market risks, and their performance is tied to how well the ETF firm is performing. You can incur losses if the firm’s balance falls below a certain amount or the NAV falls below a certain amount. You can avoid these risks by carefully selecting a gold ETF after assessing its past performance.

Gold ETF Charges

Gold ETFs have several associated costs:

- Expense ratio: Typically around 1%, this fee covers the cost of managing the fund.

- Broker charges: Applicable when buying or selling gold ETF units.

- Tracking error: Not a direct charge but an important factor, as it affects how closely the ETF tracks the gold price.

How are Gold ETFs Taxed?

Gold ETFs are subject to capital gains tax. If you sell the units within 12 months, the gains will be treated as short-term and taxed according to your income tax slab. For units held longer than 12 months, the gains are classified as long-term and taxed at a rate of 12.50%.

In Conclusion

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