This is a simple investment product that combines the stock investment and gold in the form of investments. In India, ETFs trade on the National Stock Exchange and like any other company stock, it can be bought and sold continuously at market prices.
Gold ETF is a passive investment that is based on gold prices and is invested in gold bullion. Gold ETFs are funds that invest in physical gold of 99.5% purity. Because of its unique transparent structure, the ETFs have much lower expenses as compared to physical gold investments.
ETFs allow investors to have access to gold while avoiding the costs and inconvenience of markups, storage and the security risks of holding physical gold. However, the investor will have to pay on the investment value each year to the fund’s expense ratio. An expense ratio is the recurring annual fee charged by funds to cover its management expenses and administrative costs.
A gold fund is an open-ended fund which invests in units of a gold Exchange Traded Fund (ETF). The basic aim of the fund is to create wealth by tapping the potential of gold as a commodity. It is suitable for investors who have a desire to take exposure to gold. It is convenient to invest in gold via gold funds instead of holding the commodity in a physical manner. For an investor, buying a gold fund is easier because you don’t need a Demat account, which is required to invest in a gold ETF. Investors in gold funds can invest through the SIP route, which is not possible when investing in the ETF. However, both these forms of investments in gold track the price of gold and have similar returns and little to choose from other than liquidity in case of ETFs.
As for converting gold ETFs to physical gold, most ETFs allow investors to convert only a minimum of one kg of physical gold. Gold ETFs are similar to mutual fund units where each unit is equivalent to one gram of gold, though some funds give the option to invest in lower denominations of 0.5 gram as well. Conversion of gold ETFs into physical gold is usually possible only after it has exceeded a certain size of expenditure.
Physical gold is the most direct exposure to gold. Gold in bulk form is referred to as bullion, and it can be cast into bars or minted into coins. Gold bullion’s value is based on its mass and purity rather than by a monetary face value. Though the gold coin may be issued with a monetary face value, its market value is tied to the value of its purity of gold content. One has to pay the full price when buying physical gold.
Gold in the physical form can be bought from government mints, private mints, precious metal dealers and jewelers. As different sellers may offer the exact same item at different prices, it is important to do your research to find the best deal.
Physical gold ownership involves a number of costs, including storage and insurance costs, and the transaction fees and markups associated with buying and selling the commodity. There can also be processing fees, making charges and other small fees when investors make purchases. While collectively these costs may not significantly affect someone looking to invest a small portion of their portfolio in gold, the costs may become prohibitive for investors seeking to gain larger exposure.
Gold has always been considered as a speculative investment. Investors usually choose ETFs to that their risk is spread among several other assets. But as some of these funds invest exclusively in gold, their gains or losses are tied directly to the price of gold.