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. Just as an equity mutual fund, where a pool of money is gathered from investors by an asset management company (AMC) to invest in shares, so is the case here, but with pure gold as the underlying.
The AMC allots units to the investors that can be then traded on the exchanges. The price of the ETF correlates with the underlying physical gold, adding the flexibility of equity investment to the age-old simple gold investment.
In basic terms, buying gold ETFs means purchasing gold in the electronic format.
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.
This can be understood with this example: suppose the AMC decides to allot the value of 1 gram of gold to each unit, in that case the price of each unit will be approximately the same as the price of 1 gram of gold. There are various investment funds that enable consumers to trade in Gold ETFs. Some of them include Nippon India Gold ETF, Axis Gold ETF, Kotak Gold ETF among others.
Ways To Buy Gold Etfs
There are two methods of investing in Gold ETFs; one is the direct route and the second is the passive route of investing.
Direct route: Buying units of gold ETFs requires opening a demat account through a stock broker. Post which, just as we purchase shares, units of gold ETFs can be purchased via the stock exchanges directly.
Documents Required To Open A Demat Account
Having a Demat account is a basic requirement to trade in gold ETFs. The following are the documents required to open a Demat account
- Permanent Account Number (PAN)
- Address proof
- Identification proof
Indirect route: In case one doesn’t want to invest in gold ETFs via the demat option, they can invest into gold funds that indirectly invest in gold ETFs. For example, the HDFC Gold fund that invests in HDFC Gold ETFs. These are called fund of funds. This option is usually preferred by investors for whom mutual fund investment through their app is convenient or better understood.
Steps To Buy Gold ETFs
The following are the steps to buy gold ETFs online:
Step 1: Consult a stockbroker and open an online trading and Demat account.
Step 2: On the trading portal login into your account with your login credentials.
Step 3: Now, select the gold ETFs you wish to buy.
Step 4: This step is to select the quantity you wish to purchase.
Step 5: Once you purchase your desired amount of gold ETFs you will receive a confirmation message on your registered mobile number and email address.
Pros And Cons Of Buying Gold ETFs
Every investor should have a basic knowledge of the pros and cons of the Gold ETFs investment plan before purchasing. The following are some fundamental factors of Gold ETFs:
Bottom Line
Investors comfortable with the idea of digital options should understand the liquidity, risk and investment period requirements and analyze the pros and cons before investing in buying gold ETFs.
The key point is to have a diversified portfolio and to achieve the same via investing in gold can prove to be a good choice if done with in-depth research and understanding.
