5 Factors to Consider Before Investing in Gold ETFs

5 Factors to Consider Before Investing in Gold ETFs

The Indian market of gold ETFs (exchange-traded funds) is of 10 years. These ETFs as an investment option have shown remarkable growth due to some reasons. One is the usual high demand for gold in households together with the global uncertainty induced by the pandemic. Another is the geopolitical tensions between the USA and Russia after the 2020 presidential election.

But market shares of gold ETFs are low, although growing, putting them in unpredictable infancy. So, it is important to consider the following 5 points before investing in gold ETFs.

5 Things to Consider for Gold ETF Investment

  • Past performance record of the asset management company: Check how gold ETFs of the chosen asset management company have performed in the past. If the performance is good, you can expect the same in future besides general overall efficiency.
  • Liquidity: Also, check the trading activity on a gold ETF. When it is high, liquidity goes up and you can enjoy higher returns.
  • The tracking error of an ETF: Exchange-traded funds usually track their underlying indexes in detail. The general recommendation is that you must choose a gold ETF fund having the lowest possible tracking error.
  • Applicable taxes: Learn the taxes applicable to gold exchange-traded funds before investing in them. On redeeming them, you need to pay capital gains for up to 3 years because they’re regarded as non-equity assets. Long-term capital gains are taxed at 20% after considering indexation benefits. As these ETFs are not equities, they aren’t subject to the Securities Transaction Tax.
  • Hedge against inflation
  • Unlike equities, gold ETF funds don’t provide revenue over time. Rather they act as hedges to protect your portfolio from inflation. This also implies that these funds perform well even during periods of economic uncertainty.

Additional Points to Consider

The above 5 factors are crucial to consider when you choose to invest in gold exchange-traded funds. But you should also know the following additional information:

  • Selling or purchasing gold ETFs has no impact on the fund’s AUM (assets under management). While the AUM remains as it is, solely the transfer of ownership in an ETF transaction occurs.
  • The Securities and Exchange Board of India regulates gold ETF funds, every unit of which is supported by a physical unit of gold of equal value. Most of these funds keep the physical gold in custody with the Scotiabank (the Bank of Nova Scotia), branches in Delhi and Mumbai.
  • Only the market value of physical gold can directly affect the prices of gold ETFs.
  • You can buy and sell these ETFs in the stock market with the help of a Demat account. This works exactly like any other asset that you trade in the stock market.

It is good to use gold ETFs not as a daily profit-trading way but as hedge investments and safe assets. Avoid rash purchasing and selling to prevent incurring losses. Wisely consider each aspect of investing in these funds and carry out thorough research to find a good asset management company so you can benefit from your investment.

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