Sharekhan Blog

How To Invest In Gold ETF?

  • Mar 9, 2024

In this article, we will learn the understanding of the gold ETF dynamics, contrasting against alternatives for harnessing upside as an inflation-proof portfolio.

Understanding The Gold Exchange Traded Funds

A Gold ETF comprises a structured mutual fund product purchasing and storing physical gold bullion bars backing every unit while trading fund value fluctuations, replicating precious metal price movements like conventional shares on exchanges. Each unit thus offers fractional gold ownership sans physical encumbrances.

Legally, fund houses ensure adequate gold reserves stored in secured vaults under SEBI regulations, equaling the number of outstanding ETF units at all times for conversion guarantees if required. By simply buying/selling ETF units on bourses using integrated demat trading accounts, retail investors thus benefit from direct precious metal value exposure and liquidity to regular shares while overcoming challenges in direct jewellery/coin acquisitions or disposals due to wider bid/ask spreads, secure storage and quality assessment needs which increase costs and friction while liquidating.

Gold ETF Pricing And Its Basics Standards

Traded freely intraday on stock exchanges at prices aligned to 99.5% gold purity (term: fineness), which is the industry standard, daily ETF values fluctuate by tracking international or domestic gold rates. 

However, slight deviations from spot benchmarks arise from market making spreads and fund house expense ratios, limiting tracking accuracy marginally, ensuring smooth tradings by investors. These minor differentials compare extremely favourably against high making charges and impurity risk associated with physical jewellery, where 22K-24K gold requires conversions using imperfect reference rates during resale. 

ETFs also surpass alternatives like gold savings funds and e-gold in cost efficiency, traceability and tax optimisation, making them the instrument of choice for holding gold digitally without physical loads.

Ideal Risk Profile Compatibility For Gold ETF Investors 

Stable asset class mitigating crisis turbulence for well-constructed portfolios over long periods, gold suits conservative or balanced moderate risk temperament investor types optimally rather than just aggressive high-risk takers alone expecting outsized growth who may get perturbed by intermittent corrections.

Stability prioritising well-informed HNIs, family offices, NRIs, and risk-averse millennials find gold's layered qualities allow sound diversification, inflation protection and geo-political tensions hedge across core holdings like fixed income and equities, which face volatility but prove rewarding over decades.

Why Choose Gold ETFs Over Physical Gold

Gold ETFs offer multiple advantages over direct physical gold buying in jewellery or bar forms:

  1. Convenient trading - Purchase/sell just like stocks through brokers seamlessly in real-time along market hours instead of jeweller visits
  2. Price transparency via stock exchanges - Investors benefit from live bullion rates access, enabling better opportunity insights
  3. Lower acquisition costs - No additional charges like entry/exit loads or making charges levied beyond marginal brokerage cost efficiency
  4. Tax optimisation - Capital gains applicability similar to equities but exempted from wealth taxes, unlike physical gold holdings crossing specified quantity thresholds annually
  5. Risk circumscription - Prices are relatively stable with fluctuations capped compared to general equities market drawdowns seen during bear cycles, thus offering isolated protection buffer

How To Invest In Gold ETF?

Following are the steps on how to buy Gold ETF or how to buy Gold ETF online:

Step 1) Open Trading and Demat Accounts

Initiate online share trading by opening an integrated demat and trading account with a SEBI-registered broker providing commodities derivatives access that allows gold ETF orders placement.

Step 2) Log In to The Trading Platform

Using account credentials, sign in to the broker's trading platform on a mobile/desktop app supporting fund house products.

Step 3) Select Desired Gold ETF Scheme

Browse and select gold ETF by a reputed issuer matching outlook from options like ICICI Gold ETF, SBI Gold ETF, Kotak Gold ETF, etc., before placing an order.

Step 4) Enter Order Details 

On scheme selection, confirm investment amount, order type, price and validity before order placement for execution.

Step 5) Track Order Status

You will receive updates over email/SMS regarding order confirmation and unit allotment status within trading hours.

Step 6) Fund Settled Automatically

Settlement happens automatically through a linked bank account debited as per order value a day post transaction without manual intervention.

Conclusion

Gold ETFs offer a balanced risk-return profile, allowing investors to tap into the metal's twin appeals of stability and inflation hedge intelligently using regulated liquid products traded intraday-like shares without holding challenges. When applied prudently as insurance components complementing traditional assets facing volatility over long durations, gold integrations uplift portfolio consistency, delivering better risk-adjusted outcomes and helping reach financial goals resiliently in spite of interim chaos, thus gaining 5-15% core parking component status in plans safeguarding prosperity amidst uncertainties.

Team Sharekhan
by Team Sharekhan

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