Even a simple investment can disappoint when basic precautions are ignored. Newcomers who learn what is Gold ETF is often feel the product is risk-free because it is backed by metal, which is not quite true. Others focus only on how to invest in gold ETF and overlook what happens after the purchase. This article highlights the most common mistakes made by Indian investors and shows how a few checks can save money, stress and disappointment.
Ignoring Costs Hidden in Plain Sight
A lot of investors often ignore the expenses involved when investing. The expense ratio is the annual fee that comes out of the fund’s assets. This means you’re losing out on this amount every year. A small difference between funds can really add up over the course of a decade. Try to compare the expense ratios; however, the cheapest isn’t always the best as sometimes there’s less liquidity.
Broking fees, exchange fees, tax on fees and demat fees will all apply. Buying in small amounts regularly can cause you to spend a fairly significant amount of your investment due to the fixed charges. Try to batch up your orders and use a broker with reasonable delivery charges.
Liquidity and Spreads
Sometimes a fund might look like a good investment but have very low liquidity. This means that there isn’t a high number of buyers/sellers and can result in a large spread between what you’re buying at and what you can sell at. Orders can also be filled at unfavourable prices.
Check the average daily volume and watch some live prices for a few sessions. Try to invest in funds with steady volumes and low spreads. Always use limit orders rather than market orders, especially if it’s an illiquid fund.
Premiums
Prices on the exchange can sometimes be quite different to the intrinsic value of the gold. Most platforms will show an indicative value, which will be updated throughout the day. If the market price is much higher than this, then you could be paying a premium. If the price is lower than this, then you’re getting a discount.
There will always be small differences but if it’s a large difference then you should be cautious. Sometimes waiting a little while or investing in a different fund can help you save. Be careful of tracking errors. These show how closely the fund tracks the price of gold. A well managed fund will have a low tracking error and this can be seen on the fund’s fact sheet.
Emotional Investing
During festivals, wedding season and any sudden news you can be tempted to invest. Social media can often be misleading and claim that prices are going to rocket or plummet. You can get caught up in the hype and invest a lot at a high price or sell quickly during a dip.
The best way to avoid this is to remain calm and invest in a regular fashion. Set the amount you want to invest and invest slowly. Also set a regular time to review your investments. You should be wary of any friends or social media posts claiming guaranteed profits. There is no guaranteed outcome with gold (or any asset) and genuine advisors will never guarantee profits.
Over Exposure and Not Understanding
Some people can get over exposed to gold as they feel it’s safe and straightforward. However, it won’t give you any interest or dividends and can often stagnate. If your portfolio is too gold heavy it can hinder you from growing your portfolio as much as you need to for long term goals such as retirement.
Remember any ornaments/coins you already have count towards your overall investment. Think carefully about how many listed units you want to invest in. Gold should be used to diversify and provide security so try to keep it to a reasonable percentage depending on your age and goals.
Tax, Nomination and Documentation
A lot of people get caught out with tax. At present, any gains made on listed units that have been held for longer than 12 months will qualify for long term tax (flat rate). If they’ve been held for less then they will be taxed at your income slab. Tax rules can change so double check or speak to a professional before selling.
A lot of people forget to nominate their demat account. This can cause issues for family members trying to claim the units. Make sure to add a nominee, keep your contact details up to date and keep your contract notes and statements in order. Also make sure your account isn’t dormant as this can cause issues.
Getting Scammed
Scammers will often target your interest in gold and offer unrealistic returns or fake platforms. Some may ask you to pay upfront or ask for personal information. Others may pretend to be brokers. Only use registered intermediaries, official apps and never give away your passwords or one-off codes. If you’re being pushed into making a decision, then take a step back.
Quick Checklist
Check that your broker is registered, expense ratios, volumes and spreads. Check the indicative value, use a limit order and set an amount. Save your contract note and record your investment. Set a yearly review.
Although these tips may seem boring, they will help ensure you’re a happy investor! Gold has a long and reputable history in Indian households and can be a quick and safe way to invest if done carefully. Just avoid these common mistakes, keep your expectations realistic and be patient!
