Investments in gold exchange-traded funds (ETFs) rose to Rs 1,337.4 crore in July 2024, the highest since February 2020. After experiencing an outflow of Rs 395.7 crore in April, gold ETFs saw inflows of Rs 2,890.9 crore between May and July.
Diversifying portfolios
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 are trading at a considerable premium to the price of gold. “This 10-15 per cent premium in several tranches is pushing investors towards gold ETFs,” says Deepesh Raghaw, a Sebi-registered investment advisor.
The July Budget introduced a customs duty cut, reducing gold prices in India by about 9 per cent. “This led many investors to buy gold at cheaper prices,” says Arnav Pandya, founder, Moneyeduschool.
Fundamental factors also favour investment in gold. “We appear to be on the cusp of a shift in the interest-rate cycle. With inflation now significantly lower and concerns over slowing global growth emerging, central banks are likely to adopt a more accommodative stance, including interest rate cuts,” says Mehta. Non-interest-bearing instruments like gold tend to perform well when interest rates on bonds reduce.
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 points to central banks purchasing 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.
Price efficient and liquid
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 come with higher prices due to the lack of standardised pricing,” says Mehta.
Gold ETFs eliminate purity concerns, an issue with physical gold. They also offer good liquidity. “Since they trade on the exchanges and enjoy sound liquidity, investors can enter and exit them easily 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 making charges, as they do with physical gold options (biscuits, jewellery, etc). They are also a less expensive option than gold fund-of-fund, where the investor has to pay the expense ratio of both the ETF and the fund.
The taxation changes in the July 2024 Budget have further enhanced their appeal. “Gold ETFs, which are listed entities, will qualify for long-term capital gains after a holding period of one year. Physical gold and gold fund of fund, being unlisted, will qualify after two years,” says Raghaw.
Selecting the right gold ETF
Investors should choose the gold ETF with a low expense ratio and good performance vis-à-vis peers over the past five years. They may also consider purchasing from an established fund house.
All investors should ideally have a 10-15 per cent allocation to gold. Whether they invest in gold ETFs or SGBs should depend on their investment horizon. “When you invest in an SGB, you should be prepared to hold it till maturity. If you have a shorter horizon, go for gold ETFs, which offer better liquidity,” says Raghaw.
First Published: Aug 14 2024 | 7:32 PM IST
