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Gold Exchange-Traded Fund

Context:

In July 2022, Gold Exchange Traded Funds (ETFs) witnessed a net outflow of Rs 457 crore as investors parked their money in other asset classes as part of their portfolio rebalancing strategy.

Relevance:

GS III: Indian Economy

Dimensions of the Article:

  1. About gold exchange-traded fund
  2. Benefits of a gold ETF

About gold exchange-traded fund:

  • A gold exchange-traded fund (Gold ETF) is a passive investment fund that aims to track the price of physical gold.
  • Each unit of a gold ETF represents one gram of gold as the fund invests in physical gold and investors get the units in dematerialised form.
  • Since it’s an ETF, the units are listed on stock exchanges and investors can buy or sell units on the exchange platform like any equity instrument.
  • Simply put, gold ETF is like buying gold in an electronic form.
  • Hence, while selling a gold ETF unit, an investor will not get physical gold but the cash equivalent.
  • The cost of investment in gold ETFs is generally cheaper than that of investing in gold in physical form.
  • Gold ETFs back their assets by buying actual physical gold of 99.5% purity.
  • This physical gold is stored in vaults with the custodian bank and valued periodically, according to the Securities and Exchange Board of India (SEBI) guidelines.

Benefits of a gold ETF:

  • One benefits from investing in gold by not having to worry about things like gold purity, pricing transparency, charging, storage, and theft, among other things.
  • One can acquire as little as one unit, or one grams, at a time and still have the option to buy more units as needed, depending on liquidity and the current price of gold.
  • Being an ETF, it is a liquid investment that is always available for sale on the exchanges.
  • Additionally, under certain circumstances, certain mutual funds offer the option of redeeming with actual gold.
  • Additionally, it has several tax advantages because all income is classified as long-term capital gains and there are no additional levies, such as wealth taxes.

-Source: Indian Express


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