How Do Gold ETFs Work and What Are They?
One of the various investment options that are available in the market is exchange-traded funds. These funds can be defined as a basket of stocks that reflect the composition of an underlying Index. The NIFTY and SENSEX are prominent examples of underlying indices. Simply put, the price of ETFs is known for being the same as that of the net asset value of the stocks they are known to invest in. Passively managed, these funds are known for being publicly listed, meaning that they can be traded on exchanges like stocks. Mutual fund schemes come to generate revenue by outclassing market benchmarks in terms of performance. On the other hand, ETFs try to track a relevant index and then attempt to replicate its performance. To opt for an ETF, you are required to have a trading and even a Demat account with a stockbroker.
However, just like in the case of mutual funds, ETFs also have their different variants. One of these different variants is gold ETFs. Read below to know more about what these ETFs are and what are the different benefits that are associated with them.
What are gold ETFs?
These are the ETFs that are known for merging the best features of stock trade and gold investments. However, before signing up, it is important to note that the returns on gold ETFs are known for being dependent on the price of gold and that the fund allocation in these funds is directed towards the gold bullion. Investments in Gold ETFs are made with the help of stockbrokers. Your funds will be used by the stockbrokers to invest in gold at the market rate.
Please make note of the fact that when it comes to these funds, one unit of gold ETF is comparable to one gram of gold in terms of price. And just like company stocks, gold ETF units are bought and sold on the cash market of stock exchanges.
How do gold ETFs work?
These ETFs can be easily found on the BSE, i.e., the Bombay Stock Exchange and the NSE, i.e., the National Stock Exchange. It is possible to purchase a gold ETF on the exchange with the help of a broker by starting a trading account and a Demat account. It is also important to remember that a brokerage fee along with minor fund management charges is levied while either purchasing or selling gold ETFs.
The Gold BeES which is known for being registered on the NSE meticulously follows the latest market cost, which is also referred to as the spot prices of gold. The exchange gives power to an ‘authorised participant or member’ (which usually might be large companies or firms) for the upkeep of the gold ETFs. The constant control and trade of the ‘authorised members’ ensure that the cost of gold and ETFs remain the same.
What are the advantages associated with gold ETFs?
Listed below are some of the benefits that are associated with these exchange-traded funds:
- Gold ETFs come with high liquidity:
A major benefit of gold ETFs is that they are known for offering liquidity. One of the reasons behind their liquidity is that these ETF funds are traded on the stock exchange. Furthermore, liquidity also ensures that you can access your funds easily in case of urgency.
- Making charges aren’t involved:
In cases of purchasing physical gold such as jewellery, coins, bars, and other objects made of gold, you also need to worry about the making charges involved. However, in gold ETFs, no making charges are involved.
- The prices of gold ETF units don’t differ:
If you are thinking of buying physical gold, you need to brace for the fact that the price of physical gold will differ from place to place. So, another thing that works in favour of gold ETFs is that you don’t need to research extensively about what it costs at different places.
A gold ETF is suitable for investors seeking to diversify their investments with exposure to the gold market. As stated earlier, investments in this scheme are directed towards standard gold bullion that comes with a purity of 99.5%. If you are someone not want to spend on the storage of physical gold, gold ETFs might be an ideal solution.