Gold ETFs are similar to mutual funds that are traded on stock exchanges, i.e., one can buy and sell units from the stock exchanges.
Gold Exchange Traded Funds (ETFs) are a great investment choice if you find buying physical gold inconvenient, or if you want to diversify your portfolio. Gold is considered a safe asset, which means that its prices are usually not very volatile.
How Gold ETFs Work
Every unit of a Gold ETF represents one gram of gold and is of 99.5% purity. This physical gold is stored in vaults of custodian banks and works as the underlying from which the units derive value.
Gold ETFs fall into two basic categories: ETFs that own physical gold and those that own gold mining stocks. Some ETFs own physical gold bars stored in vaults and aim to match the movement of the price of gold, while other ETFs own the shares of several gold mining companies, giving investors broad exposure to the sector.
Benefits of Investing in Gold ETFs
No price variation: Gold ETFs are bought and sold at the same rate, which is not the case in case of physical gold. The physical gold market operates at different prices in different geographical locations. Also, the buying and selling rates are different in order to cover the liquidation and other costs that are incurred in the trading of physical gold.
Purity: When you deal in Gold ETFs, the purity is assured as the sector is organized and 99.5% purity is the standard, whereas the physical gold market lacks the transparency to generate trust in the purity.
Liquidity: The convenience of selling the product which is listed and traded on recognized stock exchanges can never be matched to transacting in physical gold.
No fear of theft: Gold being stored in a demat form rescues the investor from the worries that physical gold brings with it. It also helps investors save on locker charges, which are otherwise incurred to keep the physical gold safe.
No entry and exit load: The investment in Gold ETFs does not charge any entry or exit load as it is traded on the stock exchange.
No indirect taxation cost: Physical gold attracts indirect taxes such as GST at the rate of 3% on the purchase and sale value. This cost is saved in the ETF transactions as ETFs are securities and securities are specifically excluded from GST.
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