Exchange Trade Funds (ETFs) are open ended mutual funds that are listed and traded on stock exchange like common stocks. The ETFs comprise of stocks, bonds or commodities that are passively managed and traded close to its NAV during a trading day. These are low costs in nature and tax efficient as well. ETFs undergo a frequent price changes in a day and are regularly traded, thus making them highly liquid and one of the most popular exchange traded product. So, basically in an ETF owns several underlying assets like stocks; bonds, foreign currency etc., and the assets are broken into shares. The shareholders are then the indirect owner of these assets. At the same time the holders of ETF shares get to earn profits in form of interest earned or dividends paid out, also making them entitled to the value once the fund is liquidated. These funds can easily be transferred since these are traded on public stock exchanges.
What are Gold Exchange Trade Funds (ETFs)?
Gold ETFs is how an investor can be a part of gold bullion market. So, with the funds invested, without involving the physical delivery of gold, the same are converted into papers. Quite like a share, a unit of GETF can be purchased or sold at the stock exchange, who’s per unit price is taken to be equivalent to 1 or sometimes half a gram of gold on the date of allotment, which is clearly and accordingly mentioned. The value of GETFs are directly dependent on the gold prices; so when gold prices rise, so does the ETF value and likewise is the effect of falling prices of gold on GETFs value.
How do they work?
Depending on the cost of per gram gold at the time of allotment, the amount of fund you wish to invest in GETFs will determine the number of units that will be allotted to you as an investor. Say for example your total investment fund amount is Rs. 20,000 and on the given date of allotment the price of one gram of gold is Rs. 1000, you might calculate the number of units to be clearly 20.
Advantages and other compelling reasons of investing in Gold ETFs
- Can be easily traded on stock exchange like stock
- Convenient and fast dealing via demat account
- Electronic form of holding a global asset that also give diversification to the portfolio
- Transparent pricing
What do the investors require?
To be able to invest into Gold ETFs investors need a demat account and a trading account with stock exchange broker.
Tax treatment
GETFs are treated as Mutual Funds and taxed based on non-equity mutual fund rules. However as per the non-equity tax laws, investors have to pay after redemption, but with Gold ETF the tax redemption will be similar to taxation rules that apply for physical gold.