Investments in gold exchange-traded funds (ETFs) rose to Rs 1,337.4 crore in July 2024, the highest since February 2020. After experiencing outflows of Rs 395.7 crore in April, gold ETFs saw inflows of Rs 2,890.9 crore between May and July.
Diversifying the Portfolio
With equity markets trading at elevated valuations, many investors are turning to gold to diversify their portfolios. “The low 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 significant premium to the gold price. “This premium of 10-15 per cent in multiple tranches is pushing investors towards gold ETFs,” says Dipesh Raghav, a Sebi-registered investment advisor.
Customs duty was cut in the July budget, which led to a drop in gold prices in India by about 9 per cent. “This led many investors to start buying gold at cheaper prices,” says Arnab Pandya, founder of MoneyEduSchool.
Fundamental factors also favour investing in gold. Mehta says, “We are on the verge of a change in the interest rate cycle. Inflation has now eased significantly and concerns of a slowdown in global growth are emerging, so central banks are likely to adopt a more accommodative stance, including cutting interest rates.” Non-interest bearing instruments such as gold perform well when interest rates on bonds are low.
According to Pandya, rising geopolitical risks, including the ongoing conflict between Russia and Ukraine and the possibility of wider conflict in West Asia, have also pushed investors towards this safe asset.
Mehta said 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.
Price Efficient and Liquid
Gold ETFs offer price efficiency by allowing investors to buy smaller quantities at wholesale prices. “This is particularly 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, which is a problem in case of physical gold. They also offer good liquidity. “Since they trade on exchanges and enjoy good liquidity, investors can easily enter and exit them at any time,” says Pandya.
After purchase, gold ETFs are credited to the investor’s demat account, eliminating the worry of theft. Investors also do not have to pay making charges, as they have to do with physical gold options (biscuits, jewellery, etc.). They are also a less expensive option than gold fund-of-funds, where the investor has to pay the expense ratio of both the ETF and the fund.
The changes in taxation made in the July 2024 Budget have further increased their appeal. “Gold ETFs, which are listed entities, will become eligible for long-term capital gains after a holding period of one year. Physical gold and gold funds of funds, being unlisted, will become eligible after two years,” says Raghav.
Choosing the right Gold ETF
Investors should choose gold ETFs with low expense ratios and those that have outperformed their peers over the last five years. They can also consider buying from an established fund house.
All investors should ideally invest 10-15 per cent in gold. Whether they invest in gold ETFs or SGBs should depend on their investment horizon. “When you invest in SGBs, you should be prepared to hold it till maturity. If you have less time, choose gold ETFs, which offer better liquidity,” says Raghav.
first published: 14 August 2024 | 7:32 pm First
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“Seek gold liquidity? Try gold ETFs”
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Investments in Gold ETFs Soar to Record High in July 2024
Investments in gold exchange-traded funds (ETFs) reached a record high of ₹1,337.4 crore in July 2024, following a surge in inflows of ₹2,890.9 crore between May and July.
Diversifying the Portfolio
Investors are turning to gold ETFs as a way to diversify their portfolios, taking advantage of the low availability of sovereign gold bonds (SGBs). According to Chirag Mehta, chief investment officer at Quantum Asset Management Company (AMC), "The low availability of SGBs has made gold ETFs an attractive option." Dipesh Raghav, a Sebi-registered investment advisor, agrees, stating that the 10-15% premium on SGBs is driving investors towards gold ETFs.
The recent cut in customs duty led to a 9% drop in gold prices in India, making it an attractive buying opportunity. Additionally, fundamental factors favour investing in gold, with Mehta expecting a change in the interest rate cycle, inflation easing, and central banks adopting a more accommodative stance. Arnab Pandya, founder of MoneyEduSchool, notes that rising geopolitical risks have also pushed investors towards gold.
Price Efficient and Liquid
Gold ETFs offer price efficiency, allowing investors to buy smaller quantities at wholesale prices. Mehta emphasizes that this is particularly valuable in the gold market, where smaller denominations often come with higher prices due to the lack of standardised pricing. Gold ETFs also eliminate purity concerns and offer good liquidity, making it easy for investors to enter and exit the market.
Taxation Changes
The recent changes in taxation have further increased the appeal of gold ETFs. According to Raghav, "Gold ETFs, which are listed entities, will become eligible for long-term capital gains after a holding period of one year. Physical gold and gold funds of funds, being unlisted, will become eligible after two years."
Choosing the Right Gold ETF
When choosing a gold ETF, investors should opt for those with low expense ratios and those that have outperformed their peers over the last five years. Established fund houses and ETFs with good track records are also worth considering.
Investment Tip
All investors should ideally invest 10-15% in gold. Depending on their investment horizon, they can choose between SGBs and gold ETFs. SGBs require investors to hold till maturity, while gold ETFs offer better liquidity.
First Published
August 14, 2024 | 7:32 pm
