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Comparison Between ETFs and Gold ETFs in India

A few of the Best Gold ETFs in India continue to draw investor interest, with net assets of ₹ 683 crores in November, as the Gold rates drop and Omicron fears encourage investors to consider investing in Gold ETF fund. Gold ETF investment India recorded a net inflow of Rs 24 crore in November 2021 alone.

While the gold ETF investments rose rapidly during the past few months (as of Feb-22), the investment in other ETFs also gained its pace. But, what should you choose between gold ETF and other ETF? This blog will explain what is ETF gold investment, how to invest in gold ETFs and the gold ETF taxation policy in India.

What is ETF Investment in India?  

ETFs investment in India is a marketable product that tracks an index, a basket of assets or a commodity, bonds, such as an index fund.

They track indexes such as the CNX Nifty or the BSE Sensex. For instance, when you purchase ETFs, you buy a portfolio that tracks the yield and return of its original index. The fundamental distinction between ETFs and other forms of index funds is that ETFs do not attempt to beat their associated index; instead, they merely copy the index’s performance. They don’t aim to outperform the market; instead, they want to embody it.

ETF Benefits

Both institutions and individuals have seen the benefits of these instruments—a basket of assets tailored to mimic an index with reduced management fees and more intraday price visibility.

  • ETFs are well-diversified since they generally invest across a large list of companies in a sector. 
  • They offer high liquidity because they are traded on the stock exchange, and you can buy or sell them anytime, without having to follow any lock-in period.
  • ETFs are low-cost investment instruments as their fees are often lesser than mutual funds. 
  • It offers a great investment strategy by investing across sectors and minimizes the risks involved.
  • You can use it as a risk-hedging instrument to hedge market risks by taking action (buy or short-sell) opposite the step you may take for other securities.

What is an ETF Gold Investment?  

Gold Exchange Traded Funds (Gold ETFs) are passive investments that follow the domestic gold market and hold gold bullion. The value of one unit of a Gold ETF is 1 gram of gold in the purest form. The trade-in units represent gold and are presented in paper or dematerialized form. 

How Does Gold ETF Investment in India Work?

Like any other stock, Gold ETFs are listed and traded on the National Stock Exchange of India (NSE) and the Bombay Stock Exchange Ltd. (BSE). Gold ETFs trade in the cash sector of the BSE and NSE, just like any other corporate stock, and maybe bought and sold at any time at market pricing.

When you purchase gold ETFs, you are purchasing gold in an electronic form. Gold ETFs may be bought and sold just like stocks. You don’t get physical gold when you redeem the Gold ETF; instead, you get the monetary equivalent. Gold ETFs are traded through a dematerialized account (Demat) and a broker, making them a straightforward option to invest in gold electronically.

Gold ETF Benefits

Let’s answer why gold ETFs are good investment options by understanding what benefits they offer.

Flexibility

You can buy and deposit Gold ETFs in your Demat account through the internet. The Asset Management firm trades them on a stock exchange, and you can enter and depart whenever you choose. Gold ETFs function exactly like actual gold, even in the Demat format.

Liquidity

The Liquidity in Gold ETFs is high since investors may exchange them on the stock market during trading sessions at the current price. Also, transaction costs are lower for Gold ETFs, versus physical gold because the actual gold price will add sales tax (VAT) on the price whereas, when you buy gold ETF, you do not pay any VAT.

The Denomination is Small 

You will need a lot of money to purchase gold from a shop. But, with gold ETFs, you have the option to choose the amount you want to buy and sell. While there is no precise number as to the minimum investment amount for gold ETFs, you have to buy at least 1 unit of gold ETF which is equal to 1 gram of gold.

No Storage of Gold

You own gold without owning them physically when you buy gold ETFs. Hence, you do not need to worry about physically storing them since they are in a dematerialized account. 

Some of the Best Gold ETFs in India

You can protect yourself against a market drop with the finest gold ETFs in India as mentioned below:  

  • Invesco G-ETF
  • HDFC Gold ETF
  • UTI-Gold
  • Nippon ETF Gold 
  • SBI Gold ETF
  • Axis Gold ETF
  • IPRU Gold ETF
  • Kotak MF-GETF
  • Birla Gold ETF 

Gold ETF Taxation

Gold ETFs are also subject to capital gain tax under the Income Tax Act, 1961. The capital gain tax on gold ETFs can be short-term or long-term depending on the period of holding. 

If gold ETFs are held for a period of fewer than 3 years then they will attract short-term capital gain tax, whereas if they are held for more than 3 years, then long-term capital gain tax will be applicable.

Short-term Capital Gain Tax: It is charged at an individual’s slab rate which means if you have a short-term capital gain on the gold ETFs, it will be added to your total income for tax calculation purposes and you will be taxed at an applicable slab rate of that financial year. 

Long-term Capital Gain Tax: it is charged at a 20% long-term capital gain tax rate plus any cess that is applicable. However, before applying a 20% tax on the capital gain, you will get an indexation benefit which will adjust your purchase price to incorporate inflation during the period of holding.

Tax-efficiency

Unlike physical gold, gold ETFs are relatively tax-efficient since they are not subject to wealth tax, and security and storage (in a Demat account) are not an issue. The result is that you have complete control over how long you retain your ETFs.

How to Invest in Gold ETFs?

All you need is a Demat account with an online stock trading account if you wish to invest in gold ETFs. You can now pick Gold ETFs you want and place an order through your broker’s trading site after you’ve set up your account.

You can also invest in Gold ETFs through WealthBaskets which may have it as a constituent. WealthBaskets are a portfolio of ETFs or stocks handpicked specifically by SEBI-licenced investment professionals. WealthBaskets are available for investment at WealthDesk.

Are Gold ETFs Good Investment Instruments?

Gold ETFs are good instruments if you want to get the benefits of gold price fluctuations without physically owning them. You can also invest in gold ETFs to diversify your portfolio by adding a commodity to it.  

Conclusion

Gold ETFs and other ETFs have their benefits and drawbacks. The decision to invest in any instrument will precisely depend on your investment goals, risk appetite, and the period you want to stay invested. 
You can also pick baskets of ETFs already created by industry professionals. At WealthDesk, our SEBI-approved investment analysts have made WealthBaskets that consist of stocks and/or ETFs reflecting an investment strategy or theme.

FAQs

What are Gold ETFs in India?

Gold ETF tracks the index of the domestic physical gold price. Hence, you can invest in gold without physically owning them. 

Which is better: a gold fund or an exchange-traded fund?

The gold ETF is a good alternative for people searching for a low-cost way to invest in precious metals since they are cheaper than gold funds.

Is it good to invest in gold ETFs?

Gold ETFs are heavily regulated, ensuring that investors’ interests are always protected. Apart from that, gold ETFs are tax-efficient due to the long-term capital gain tax and indexation benefits.

Comparison Between ETFs and Gold ETFs in India

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Comparison Between  ETFs and Gold ETFs in India

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