Investing in Gold ETF

The shine and aura of gold never fails to attract! Among the precious metals, gold has always been the most attractive, be it as jewels or currency. Even though we have switched over to paper money and other metals are competing with gold, still gold remains the only metal worth investing in. Gold has almost all the features of money and hence it has been traded since times immemorial. As Indians we have always invested in gold jewellery as an asset and security. Another form of investment in gold that is widely catching up is investment in the form of Gold ETF (exchange-traded fund).

What is Gold ETF?

Gold Exchange-Traded Fund (GETF) means gold is traded on the major stock exchanges. ETFs are somewhat like mutual funds which trade in the stock market. While mutual funds hold stocks in other companies, Gold ETFs hold gold deposits. Gold ETFs are a way to gain exposure to the gold price, without the inconvenience of storing the precious metal physically. When you buy an ETF, you are actually investing in a conglomerate of companies, rather than in any single company.

The GETF fund purchases a large amount of gold, maintaining the physical metal in storage. They then issue shares in baskets. The value of shares increase or decrease with increase or decrease in price of gold bullions.

The gold market is subject to speculation, like other commodities are, due to the use of future contracts and derivatives. Speculations in the gold market affect its price, causing daily changes in the form of rise or fall of gold prices. A Gold ETF is an exchange traded fund that aims to track the price of gold. Price of Gold ETF depends on the price of gold.

Authenticity/security of GETFs – Gold is traded in major stock exchanges including Zurich, Mumbai, Paris, London and New York. Several associated GETFs are grouped under the name Exchange Traded Gold. The exchange traded gold funds are sponsored by the World Trade Council. All companies issuing Gold ETFs declare there volume of physical gold deposits. The ETF securities physical gold ETCs are all booked by ‘allocated’ gold bars- uniquely identifiable bars which carry no bank credit risk.

The precious metal bars are held in trust in London by the custodian Bank. The metal held by the custodian must confirm to the rules for ‘Good Delivery’ of the London Bullion Market Association. Securities are only issued once metal is confirmed as being deposited into the company’s bullion accounts with the custodian.

Risks in Gold ETFs – Profit or loss of the investors from Gold ETF depends on the rise or fall of gold prices. If the gold prices fall, then price of gold ETFs will fall and there will be loss on investment. Generally, gold prices are always expected to rise, but like any other exchange market, there are ups and downs in the gold prices too which affect the value of Gold ETF.

Expense/fees of ETF – The fund has to have physical deposits of gold, against which it issues shares. It thus obviously incurs certain cost for the storage, maintenance and insurance of the gold. This cost is charged from the investors in the form of fees/expense of investing in the Gold ETF. The fees are charged by selling a small amount of gold represented by each share. The amount of gold in each share will gradually decline over time. Different companies charge different fees.

Gold ETFs in India

Presently there are nine different Gold ETFs available in India for trading and investment on the National Stock Exchange (NSE). These are-

1. Benchmark Gold BeES
2. UTI Gold ETF
3. Kotak Gold ETF
4. Reliance Gold ETF
5. SBI Gold ETF
6. Religare Gold ETF
7. HDFC Gold ETF
8. ICICI Gold ETF
9. Quantum Gold Fund.