I have a query on Gold ETFs. Could you explain how Gold ETFs work? Also how do we redeem the investments, lets say after 5-6 years? At the time of redemption, can the gold units accumulated be converted to physical gold or will it be converted to cash and paid to the investor?
Sumesh
Gold ETFs are exchange traded funds that passively track the performance of Gold Bullion. These funds buy gold with investor's money (on the behalf of investors) and convert it into units. The units of Gold ETFs can be bought or sold on the stock exchange, just like the shares of companies. For this the investor needs to open a demat account in the stock exchange on which the units are listed. The daily net asset value (NAV) of gold ETFs is decided by the price of gold.
Coming to the last part of your question, retail investors can only exchange their units for cash and not physical gold. This provision is only available to large investors who can get the units of the Gold ETF redeemed directly from the AMC and get the equivalent amount of physical gold. But the minimum number of units that the AMC would accept for this redemption has to be in multiples of the Creation Unit. This creation unit is different for different AMCs, varying from 100 units to 1000 units. However, such redemptions could involve complicated tax implications.
This article was originally published on November 25, 2008.
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