Gold ETFs (Exchange Traded Funds), which have witnessed over seven-fold surge in AUM (Assets under Management) in the last five years from Rs 5613.22 crore in September 2019 to Rs 39,823.50 crore in September 2024, seem to be the flavour of the season ahead of the Dhanteras.
Inflows into Gold ETFs have surged by nearly 88% since the beginning of this calendar year at Rs 1232.99 crore in September 2024, up from Rs 657.46 crore in January. ICRA Analytics said in the latest assessment.
What Is A Gold Exchange Traded Fund (ETF)?
Gold Exchange Traded Fund is a type of investment that follows the price of gold in the local market. It allows people to invest in gold without physically owning it, as the investment is made in gold stored as bars.
Each unit of a Gold ETF is equal to 1 gram of high-quality gold. You can buy and sell these units on stock exchanges like the National Stock Exchange (NSE) and Bombay Stock Exchange (BSE), just like regular stocks. Instead of receiving physical gold when you sell, you get its cash value. You need a Demat account and a stockbroker to trade Gold ETFs, making it easier to invest.
Gold ETFs are linked to the real price of gold, making them transparent. They also tend to cost less than buying physical gold.
Why Gold ETF?
Gold ETFs have been increasingly gaining popularity among investors due to liquidity, transparency and global price alignment, according to ICRA Analytics.
The growing interest is evident with inflows into the fund surging by a whopping 2695% from Rs 44.11 crore in September 2019 to Rs 1232.99 crore in September 2024.
Is Gold ETF A Safe Haven?
With the escalating geopolitical tensions boosting the “safe-haven” appeal of the bullion, investors prefer to park their funds in Gold ETFs as compared to investing in physical gold as there is no hassle of storing it. Also, there are concerns of purity and theft while investing in physical gold, which is not the case with Gold ETFs.
“Investors favour investing in Gold ETFs due to liquidity, transparency, cost-effectiveness, and ease of trading compared to physical gold. The heightened activity in these funds is also driven by the prospects of an interest rate cut by the U.S. Federal Reserve in the coming months,” Ashwini Kumar, Senior Vice President and Head Market Data, ICRA Analytics, said.
Moreover, buying physical gold comes with its fair share of risk including storage, theft and impurities thereby impacting the returns. Gold ETFs are comparatively safer as they are governed by tight regulations and are traded on exchanges on a real-time basis, ICRA Analytics said.
“Investors with a short to medium-term investment horizon may consider investment through Gold ETFs. A buy on dips strategy in this case may help investors to capitalise on temporary correction in prices. Also, given the current market dynamics where equities are showing mixed trends, a modest allocation to gold may serve as a hedge against inflation and market volatility which may help balance risks in an optimum manner,” Kumar added.
There are as many as 17 Gold ETF schemes in the market and the average one-year returns was in the range of 29.12% while 3-year and 5-year returns were 16.93% and 13.59% respectively.
According to ICRA Analytics, LIC MF Gold ETF gave the maximum returns on a 1-year, 3-year and 5-year basis at 29.97%, 17.47% and 13.87% respectively. This is marginally lower in contrast to an average return of 30.13%, 18.03% and 14.88% over a 1-year, 3-year and 5-year period on physical gold.
India is estimated to be the second-largest gold consumer in the world after China. There were expectations of high gold demand during the festive season following the government’s import duty cut in July 2024. However, there are worries that high gold prices may dent investor sentiment as the same may tighten the spending power of many buyers.
How Gold ETFs Work:
Purity & Pricing: Gold ETFs are backed by 99.5% pure gold. Unlike physical gold, prices are the same everywhere in India and are listed on stock exchanges like NSE and BSE.
Where to Buy: You can buy Gold ETFs through a broker with your Demat and trading account. Some fees apply, like brokerage and management charges.
Risks: The value of Gold ETFs can change with the price of gold in the market. However, they are regulated by SEBI and audited regularly to ensure the gold backing is in place.
Who Should Invest?
Gold ETFs are great for those who want to invest in gold without dealing with the hassles of storing it or worrying about its purity. You can start with just one unit, and there are no extra costs like making charges that come with physical gold.
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