Gold ETF: EXPLAINED! Here is why exchange-traded fund is the safest and simplest way to invest in the yellow metal

The love for gold in India is a well-documented fact with India being the second-largest consumer of the yellow metal in jewellery form. For decades, the yellow metal has been the default investment option for several households, especially women. In most of the cases, gold is held in the form of coins or jewellery and it attracts additional cost in the form of a bank locker, just to keep it safe. What is often forgotten is that there is a better form of investing in gold without having to worry about the safety aspect and i.e. through Gold ETF or paper gold. Chintan Haria, Head- Product Development & Strategy, ICICI Prudential Asset Management Company, explains GOLD ETF and decodes why the exchange-traded fund is the safest and simplest way to invest in the yellow metal:-

What is a Gold ETF?

A Gold ETF is an exchange-traded fund (ETF) that aims to track the price of domestic physical gold. They are passive investment instruments that are based on gold prices and invest in gold bullion. Gold ETFs invest in 99.5% purity gold bullion which is as good as investing in physical metal. So, for anyone looking to accumulate gold for the long term, investing in Gold ETFs could prove to be the easiest option. Furthermore, because of its unique structure, ETFs have much lower expenses as compared to physical gold investments.

Buying gold ETFs means an investor is purchasing gold in an electronic form. One Gold ETF unit is equal to 1 gram of gold and is backed by physical gold of very high purity. One can buy and sell gold ETFs just as you would trade in stocks. Just like a stock of any company, Gold ETF are listed and traded on the stock exchanges and can be bought and sold continuously at market prices. Hence, Gold ETF combines the flexibility of stock investment and the simplicity of gold investments. Gold ETF is best used as a tool to benefit from the price of gold rather than to get access to physical gold.

Who should invest in Gold ETF?

Gold ETF is ideal for those who wish to invest in gold but do not want to be bothered with matters such as purity of gold, storage hassles etc. As per one's requirement, investors can invest either at regular intervals through systematic investment plans (SIPs) or can invest in one go by parking their lump sum amount. An investor can purchase as low as one unit (1 gram). Unlike gold jewellery, there is no making charge in ETF, so investors stand to save substantial amount of money if their investment.

Advantages of Gold ETF Units

Improves Affordability: The cost of investing is much lower than buying, storing and insuring physical gold.

Liquidity: Unlike jewellery, coins or bars, units can be liquidated as per requirement of the investor. It can be bought and sold at Real Time NAV (Net Asset value) on exchanges.

Reliable: Gold ETF aims to purchase gold of 99.5% purity or higher.

Diversification: Adding gold to your investment portfolio can be a good way of diversification.

Tax Efficient: It is a tax efficient way to hold gold as the income earned from them is treated as long term capital gain. There is wealth tax, security transaction tax, sales tax etc.

Collateral: ETFs are accepted as collateral for loans.

No Load: No entry and exit load       

How to redeem Gold ETF?

Just like buying, selling too is carried out on the stock exchange. The prices of ETFs surges or dips in sync with the prices of physical gold. When one redeems a Gold ETF, what is received is the cash equivalent and not physical gold.

In effect, through a gold ETF one can be rest assured of the exposure to yellow metal at the cheapest possible price and through the safest possible method.