Gold Exchange Traded Funds
Source: Indian Express
GS III: Indian Economy
What is discussed under Gold Exchange Traded Funds?
- What are gold exchange traded funds?
- What are the benefits of a gold ETF?
- What are the reasons for the outflow?
Why in News?
- As part of portfolio rebalancing strategy, investors pulled money out of gold Exchange Traded Funds (ETFs) in July 2022, resulting in a net outflow of Rs 457 crore.
- Association of Mutual Funds in India (Amfi) data showed that this was in comparison to a net inflow of Rs 135 crore in June 2022.
What Are Gold Exchange Traded Funds?
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- A gold exchange-traded fund (Gold ETF) is a passive investment fund that aims to track the price of physical gold.
- Each unit of a gold ETF represents one gram of gold as the fund invests in physical gold and investors get the units in dematerialised form.
- Since it is an ETF, investors can buy or sell units on the exchange platform just like any equity instrument because the units are listed on stock markets.
- An investor who sells a gold ETF unit will receive the cash equivalent rather than physical gold.
- Investment in gold ETFs typically costs less than investment in gold in physical form.
- Gold ETFs purchase 99.5% pure physical gold to back their investments.
- According to the rules of the Securities and Exchange Board of India (SEBI), this actual gold is kept in vaults with the custodian bank and evaluated on a regular basis.
What Are the Benefits of a Gold ETF?
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- No need of worrying about gold purity, pricing transparency, charging, storage, and theft.
- Lower expenses as compared to physical gold investments.
- It is a liquid investment that is always available for sale on the exchanges.
- Certain mutual funds offer the option of redeeming with actual gold.
- It has several tax advantages because all income is classified as long-term capital gains.
- There are no additional levies, such as wealth taxes.
What Are the Reasons for the Outflow?
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- Investors foresee a decrease in gold prices as a result of an increase in interest rates.
- The drop in the price of gold had an effect on the net inflows into gold ETFs.
- The falling rupee is another factor that has likely had an impact on the dynamics of gold supply and demand.
- With gold ETFs reporting large outflows as a result of declining gold prices, it has also been noticed internationally.
Exchange Traded Fund
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- An exchange-traded fund (ETF) is a collection of securities that trade like stocks on an exchange.
- ETF share prices change during the day due to buying and selling.
- Government bonds, corporate bonds, state and local bonds, and other types of bonds, referred to as municipal bonds, can all be included in bond ETFs.
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