Context: Gold ETFs witnessed an inflow in August, for the fifth month in a row, amid major economies staring at a recession due to the spread of COVID-19 pandemic.
- With all major economies staring at a recession due to the spread of the pandemic, gold, with its safe-haven appeal, has emerged as one of the best-performing asset classes and a preferred investment destination among investors
- One way of investing in gold is through exchange-traded funds (ETFs) which allow investment in gold in electronic form.
- Gold ETF is almost similar to mutual fund schemes where the underlying asset is the gold unlike stocks in equity mutual funds.
- They are investment products that combine the flexibility of stock investment and the simplicity of gold investments.
- The best part is that the gold ETF represents paper-gold as the investment is held in your Demat account.
- Gold ETFs are listed on the exchanges and can be bought and sold directly using a Demat account. When you sell your gold ETFs on the exchange, you receive its 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.
- In fact, mutual funds also allow investors who hold minimum prescribed quantities to redeem their investment in the form of physical gold.
- Gold ETFs are a good way of investing in gold as investors don’t have to worry about the security and purity of the precious metal.
Gold ETFs Vs Sovereign Gold Bonds
- Total returns on investment through gold ETFs is lower than actual return on gold (*Actual return (per gram) is assumed as = Price of gold per gram on trading exchange on date of sale - Cost of purchase of that gram of gold) whereas it is higher than actual return on gold in case of Sovereign Gold Bonds (due to the interest paid on the bond during holding period).
- Unlike Sovereign Gold Bonds, gold ETFs can’t be used as collateral for loan.
Exchange Traded Funds (ETFs)
- Exchange Traded Funds (ETFs) are mutual funds listed and traded on stock exchanges like shares.
- Like mutual funds, they pool together investors’ money to buy a diversified portfolio of stocks or bonds.
- The only difference is that instead of buying an ETF directly from a fund company, you buy a share of it through a brokerage, just like you would a stock.