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Should you invest in Gold ETF?

Gold Exchange Traded Fund is a financial instrument that is listed and traded on the stock exchanges and represents ownership of underlying gold assets. From an Indian cultural perspective, religious occasions like Akshaya Tritiya, Navaratri, Deepawali, New Year and Dhanteras are considered to be very auspicious for buying gold. Apart from these religious occasions, Indians also buy gold on other auspicious occasions in the family like birth of the child, marriage and during Grih Pravesha etc. The enormous cultural significance of gold in the Indian culture dates back to thousands of years of history. 

Broadly, mutual funds India offers two ways of investing in gold as an asset. You can buy gold in physical form as jewellery or as gold bar or coins. While buying gold jewellery is the most common form of gold purchase, it involves making charges and risk of impurities and therefore, it is not suitable for purely investment purposes. Buying gold in the form of jewellery or gold bars or coins also involves the cost of storage and theft risk etc. 

The other way is you can buy gold as financial asset either in the form of ETF or Gold fund of funds (FOF) mutual funds. Gold ETF is an exchange-traded fund which aims to closely track the price of gold. Gold ETFs tracks the price of gold in the market and has the same value of pure physical gold. The units of the Gold ETFs are traded on the stock exchange like shares of a company. You can check the NAV of Gold ETF and mutual fund schemes on the AMF India website.

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There are many Gold mutual fund schemes and ETFs offered by many mutual fund companies. 

To buy and sell Gold exchange traded fund on the stock exchange, all you need is to have demat and trading account. Alternatively, you can invest in Gold fund of funds (FOFs). Gold FOFs are mutual fund investment which invest in Gold ETFs. You should note that, the cost of gold FOF is slightly higher than ETF.

Benefits of investing in Gold ETFs

  1. Low cost – When you buy Gold ETF, you have to pay brokerage charges which is much lower than making, storing and other charges in case you buy physical gold.
  2. Security – Since Gold ETF is held in your demat account, it is absolutely safe. Physical Gold needs to be kept in bank locker which incurs charges or at home where theft risk is there.
  3. Small investment – You can buy even 1 unit of ETF or Gold mutual fund which is equivalent to one gram of Gold.
  4. High liquidity – As Gold ETF is traded on stock exchanges, you can buy or sell the units during market hours.
  5. Transparency – As traded on exchange, the price of Gold is totally transparent due to real time tracking. In case of physical Gold there is hardly any transparency.
  6. Returns – Gold ETF as a category has given over 10% annualized returns in the last 5 years’ time period Many parents start buying gold jewellery for their children’s marriage from a young age. By the time the children are old enough to get married, the jewellery design goes out of fashion. In order to make new ones the jeweller deducts the impurities from the value of gold and making charges need to be paid again for the new jewellery. Gold ETF or Gold mutual fund schemes is a better option for investing in Gold as you can even do a SIP in FOF mutual funds.
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