Investments in gold exchange-traded funds (ETFs) rose to Rs 1,337.4 crore in July 2024, the highest level since February 2020. After seeing an outflow of Rs 395.7 crore in April, gold ETFs saw inflows of Rs 2,890.9 crore between May and July.
Portfolio diversification
With equity markets trading at high valuations, many investors have turned to gold to diversify their portfolios. “The reduced availability of sovereign gold bonds (SGBs) has made gold ETFs an attractive option,” says Chirag Mehta, Chief Investment Officer, Quantum Asset Management Company (AMC).
SGBs trade at a considerable premium to the gold price. “This 10-15 per cent premium in various tranches is driving investors towards gold ETFs,” says Deepesh Raghaw, a Sebi-registered investment advisor.
The July budget introduced a cut in customs duties, which brought down gold prices in India by about 9 percent. “This led many investors to buy gold at cheaper prices,” says Arnav Pandya, founder of Moneyeduschool.
Fundamental factors also favour gold investment. “We seem to be on the cusp of a turn in the interest rate cycle. With inflation now significantly lower and concerns about slowing global growth emerging, central banks are likely to adopt a more accommodative stance, including interest rate cuts,” says Mehta. Non-interest bearing instruments such as gold tend to perform well when bond interest rates are reduced.
According to Pandya, rising geopolitical risks, including the ongoing conflict between Russia and Ukraine and the possibility of a wider conflagration in West Asia, have also pushed investors towards this safe-haven asset.
Mehta notes that central banks are buying gold to diversify their reserves away from the dollar, a trend that has been strong over the past two years and is likely to continue.
Efficient and liquid pricing
Gold ETFs offer price efficiency by allowing investors to buy small quantities at wholesale prices. “This is especially valuable in a market like gold, where smaller denominations often command higher prices due to the lack of standardized pricing,” Mehta said.
Gold ETFs eliminate concerns about purity, a problem with physical gold. They also offer good liquidity. “Since they are traded on exchanges and enjoy good liquidity, investors can easily enter and exit them at any time,” says Pandya.
After purchase, gold ETFs reside in the investor’s demat account, eliminating worries about theft. Investors also do not have to pay commissions on the purchase, as is the case with physical gold options (biscuits, jewellery, etc.). They are also a less expensive option than gold funds of funds, where the investor has to pay the expense ratio of both the ETF and the fund.
The tax changes in the July 2024 Budget have further increased its appeal. “Gold ETFs, which are publicly traded entities, will qualify for long-term capital gains after a holding period of one year. Physical gold and gold funds of funds, being non-listed, will qualify after two years,” says Raghaw.
How to Select the Right Gold ETF
Investors should choose the gold ETF with a low expense ratio and good performance compared to its peers over the past five years. They may also consider buying from an established fund manager.
Ideally, all investors should have a 10-15 per cent allocation in gold. The decision to invest in gold ETFs or SGBs should depend on your investment horizon. “When you invest in an SGB, you need to be prepared to hold it till maturity. If you have a shorter investment horizon, you should opt for gold ETFs, which offer better liquidity,” says Raghaw.
First published: August 14, 2024 | 19:32 IS
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