Gold ETFs

What is a gold ETF and how does it work?

A Gold Exchange Traded Fund (ETF) is a listed fund that invests in physical gold. You can invest in a Gold ETF just like you invest in stocks. The returns given by a gold ETF correspond to the changes in gold prices. Your ownership in a gold ETF represents a certain amount of ownership in physical gold. So you invest in gold indirectly by investing in a gold ETF.

The advantage of investing in Gold ETF over investing directly in gold is that you do not have to go through the hassles of buying physical gold and storing it. Also, you can quickly exit your gold investments when you invest in a gold ETF because they are traded in stock exchanges just like stocks. So the liquidity that a gold ETF offers is usually higher than the liquidity of direct gold investment.

How can you buy and sell Gold ETFs?

Gold ETFs are listed on stock exchanges. You can buy and sell units of gold ETFs through your demat & trading account on the platform of your broker. The time taken to buy or sell units of a gold ETF is the same as the time taken to buy or sell a stock.

What is the minimum investment required for gold ETFs in India?

Minimum investment required for gold ETFs in India is the price of one unit of the gold ETF in which you are investing. You can start by buying just one unit of that ETF.

Can I invest in gold ETFs through systematic investment plans (SIPs)?

Yes, you can invest in a gold ETF through an SIP. When you invest through the SIP route you can invest directly in the Gold ETF. Units of Gold ETF will be allotted to you by the fund. You will still need a demat and trading account because the units allotted will be listed and can be traded.

You also have the option to invest in an SIP that your broker may be offering. After every periodic interval the amount of the SIP will be automatically invested by your broker for buying units of Gold ETF.

How is the market price of gold ETF determined? Why sometimes the market price of a gold ETF is different from the market price of gold?

The inherent value of a unit of gold ETF is called its Net Asset Value (NAV). NAV of a gold ETF is the total value of the gold in which the ETF has invested divided by number of its shares or units outstanding. Since gold ETFs invest almost their entire funds in gold, NAV of a unit of gold ETF should be same as the market price of equivalent amount of gold. And the market price of a gold ETF should be same as its NAV.

But sometimes you may see difference between the market price of a unit of gold ETF and its NAV. The market price of a gold ETF is determined by the demand for the units or shares of that ETF. For example, when investors are bullish and expect price of gold to rise further in future, their demand can push up the market price of a unit of gold ETF above its NAV. Similarly, when investors expect that price of gold will go down in future, they may start selling units of gold ETFs heavily, thereby even bringing its market price below its NAV.

What are the tax implications of investing in gold ETFs in India?

As per the prevailing tax code , if you sell your gold ETF investment within one year of buying it, you will attract short term capital gains tax. So in this case any gain that you made on your investment will be taxed as part of your income. You will pay tax as per the income tax rate slab you fall in.

If you sell your investment in gold ETF after holding it for 12 months or more, then you will attract long term capital gains tax . This is 12.5% of the gains made, currently.

How is NAV of gold ETF calculated?

NAV of gold ETF = Total value of the gold invested in by the ETF / Number of outstanding units or shares of the ETF.

Can NRIs invest in gold ETFs?

Yes, NRIs or Non-Resident Indians can invest in gold ETFs in India.