What are Gold Exchange Traded Funds?

What are Gold Exchange Traded Funds?PolicybazaarAverage Rating / 5 ( reviews)
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Gold Exchange Traded Funds (ETFs) bring together the features of gold investments and stock trade. They are constructed on the gold rate in UAE and other countries, and the investments made are in gold bullion. Such transactions are made through stockbrokers, who use the money given to them to invest and to buy gold at market rates. One unit of gold exchange traded funds is equivalent to one gram of gold at the purchase price. These units are sold and bought on the cash market of a stock exchange, similar to company stock.

Features of Gold Exchange Traded Funds

The following are the features of a gold ETF:

Transparency

Similar to shares and stocks, gold rates on the stock exchange are available to the public. You can find out the value of your portfolio simply by checking the rates of gold for the hour or day.

Ease of Trade

The minimum lot or bundle that needs to be bought in order to start trading in ETFs is one unit i.e., one gram of gold. You can sell and buy the units via your ETF fund manager stockbroker on a daily or hourly basis, similar to equities.

Cost-effective

There is no exit or entry load if you invest in a gold exchange traded fund that is listed on the stock exchange. This is a charge that that is paid in order to sell or buy units. The brokerage charges involved in such a transaction are very low.

Risk is Low

The fluctuations in gold rates are not as high as equities in most cases. Therefore, even if your returns on equity investments are falling, gold ETF can act as a safety net by preventing you from incurring large losses.

Risks in Gold Exchange Traded Funds

The following are the risks tied to a gold ETF:

Fluctuating Price

Similar to an equity product, the Net Asset Value of the units held of the gold ETF can fall or rise depending on the economic fluctuations.

Total Returns are Lesser

The additional fee and charges such as the commission, brokerage, or fund management fee that are involved in maintaining a gold ETF can bring down the total returns when compared to a sale of physical gold.

Investing in Gold Exchange Traded Funds

Keeping in mind the rising preference for gold investment, exchange traded funds are a good option if your intention is only to invest in gold and not possession the precious metal as an ornament. If you are one of the regular investors in the market, there are many reasons as to why you should consider the gold ETFs in addition to your regular portfolio. Some of the factors are:

  • It is a hedging tool against currency fluctuations and inflation and is often considered as a safe investment.
  • It is more convenient to invest in gold ETFs when compared to investing in physical gold. This is because you have secure storage to worry about along with the charges it holds such as making charges.
  • You can sell and buy gold ETF via your broker at any price you like and at any time. Regardless of your place of residence, the returns of gold ETFs remain constant, unlike the physical gold which has different rates in different countries. For example, the gold rate in UAE will differ from the gold rate in India.
  • These can be used for diversification of a portfolio and to strengthen it. Diversification helps in reducing the risks of trading in volatile market situations, thereby preventing major losses.
  • They can also be used as collateral security for loans.
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