Gold ETF Positives

There are many benefits of Gold ETFs over the physical gold, though only one ETF has a dividend plan

What are the advantages of investing in Gold ETFs? Do they declare dividends? When there is a high rise or a huge fall in prices, how is the investor affected?
- Shaileja Mammen

Gold ETFs offer manifold benefits over buying gold in physical form. Gold ETFs are a lot convenient because there is no physical delivery of gold involved and hence, investors are saved of the burden of storage and security.

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Another advantage of gold ETFs, like any other ETF, is that the units of such funds are traded on the stock exchange and can be bought and sold like stocks on a real-time basis during trading hours. Gold ETFs also have the assurance of the purity of the underlying gold which one can never be sure of while purchasing physical gold from a jeweller. When investing in gold ETFs, one needs to have a demat account. One is not required to pay entry or exit loads, though brokerage is applicable.

When physical gold is sold, the jeweller will deduct the making charges and banks do not buy back gold while units of gold ETFs can be easily sold on the stock exchange at the prevailing market price.

Gold ETFs make it easy for retail investors to invest in gold as they allow investment in small denominations. Further, investing in paper gold gives tax advantages over investing in physical gold. Gold ETF units held for more than one year qualify for long-term capital gains whereas the holding period in physical form has to be three years to qualify for long-term capital gains. Also, gold held in paper form is not liable for wealth tax.

Regarding declaring of dividends, currently there is just one gold ETF-Reliance Gold ETF that has a dividend plan and it has not yet declared any dividend since its launch in November 2007.

Coming to your last question, by a huge rise or fall in prices of gold ETFs, it is apparent that you want to know the effect of a drastic price change of an ETF that stems from a big change in the demand or supply of units on the exchange. A huge rise or fall in the prices of gold ETFs is not possible as all ETFs are structured in a way that large differences between their price and the value of the underlying asset does not exist for a long period of time. If there is a huge increase in the demand or supply, then creation unit holders counter the impact of demand and supply of ETF units by buying and selling the units in the market and also by creating or destroying units, if need be. Thus, the price of the ETF units remains in line with the value of the underlying asset.

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