7 factors that shall determine your investment in Gold ETFs

At a time when gold has puzzled investors with its exorbitant rally and if you considering its potential going forward, wish to bet on the instrument, experts by and large suggest allocation in the instrument via a SIP route which can be initiated in Gold ETFs or digital gold.

So, here is a quick take on how investors should go about choosing Gold ETFs

AMFI, the mutual fund regulator in the country, defines Gold ETFs as an exchange-traded fund (ETF) that aims to track the domestic physical gold price. They are passive investment instruments that are based on gold prices and invest in gold bullion. Simply speaking, Gold ETFs are units representing physical gold which may be in paper or dematerialised form. One Gold ETF unit is equal to 1 gram of gold and is backed by physical gold of very high purity. Gold ETFs combine the flexibility of stock investment and the simplicity of gold investments.

Factors to look at while betting on Gold ETFs for diversification and other benefits including stability, hedge against inflation:

Expense ratio:

Owing to their structure and creation process, gold ETFs come with lower expense ratio when compared with physical gold.

Tracking error:

The difference between the fund and its benchmark is referred to as the tracking error and lower the matrix, higher shall be the return for investors.

Liquidity

Gold ETFs come with high liquidity as these can be easily purchased and sold off during the daily trading session.

Custodian:

Funds benchmarked to physical gold tend to keep their gold holdings with a bank custodian. So, investors in general need to be mindful of the custodian with which their fund is associated for any future exigency. Primarily in India, custodian of gold ETFs is Bank of Nova Scotia. Also, as the security is regulated by SEBI, individuals need not worry on the safety front.

Performance history:

Gold ETFs performance is typically tied to physical gold price. Also, you need to track the fund’s performance over a period of time for better know-how.

Holdings and composition of Gold ETF:

Typically being backed by physical gold, these securities invest in gold bullion. 

Tax implications:

Gold ETFs are treated as non-equity assets and attract capital gains tax. For the purpose of short term capital gains, a three years term is taken into account. Also, LTCG will continue to be taxed at 20 pr cent after considering the benefit of indexation.