All you must know about buying gold ETFs

 

Wed Sep 1, 2010 2:00pm IST

Did you know that now there is a way to invest in gold without actually holding the physical material in coins, bars or jewellery form. And, even better, you can be assured that the quality of the gold you own is without doubt of the highest order, something you can’t always be sure of with your local jeweller.
You can make an investment in gold by buying a gold exchange traded fund (ETF) and own it just like you own a share in dematerialised form. You might ask why would anyone like to buy gold without being able to see, hold and feel the metal. Here we explain to you what are ETFs and why they might be preferable to owning physical gold.
(Also Read: Buying gold in physical form - what you must know, click here)
WHAT IS A GOLD ETF?
Exchange Traded Funds (ETFs) are instruments that are listed on a stock exchange and that represent and ownership in an underlying security, commodity or asset. A gold ETF is an instrument that represents an ownership of gold assets. When you buy a gold ETF, you get a contract indicating your ownership in gold equivalent to the rupee amount of your investment.
Each unit of gold in the fund that you can buy is equal to 1 gram of gold. You will never get to see or receive delivery of the gold you own – you will only have a contract that represents your ownership interest.
In order buy a gold ETF you will need to have a demat account to hold your ETF units and a share trading account with a registered broker to trade your units. When you want to sell your ETF, all you have to do is to put in a sell order and you get the then prevailing price as trading on the exchange.
Fund management companies that sell gold ETFs are heavily regulated, so you don’t need to worry about buying an investment in gold without getting delivery of the metal. While you will face the risk of a rise or fall in gold prices, you should feel totally secure about holding gold in ETF form. In fact, the ETF is expected to buy and have in storage matching amount of gold for the amount of money that investors have put into the ETF. This gold is held on your behalf at an appointed custodian for the ETF.
BENEFITS OF INVESTING IN A GOLD ETF
1. Pricing transparency: If you go to buy gold from a jeweller, you will never be sure if the price is a right. In fact, different jewellers might price the same item differently. Compared to this, ETFs have a very transparent pricing mechanism.

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