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Gold ETFs hit 16-month high: Should you invest? We decode

When investing in gold, you should not consider gold as an investment. Rather you should consider it as insurance to your portfolio

Gold

Gold

BS Web Team New Delhi
Gold exchange-traded funds (ETFs) attracted Rs 1,028 crore in August, making it the highest inflow in 16 months, amid continued hikes in interest rates in the US, which led to a slowing down in growth rate there. With this, the year-to-date inflow in the category has reached more than Rs 1,400 crore, data with the Association of Mutual Funds in India (Amfi) showed.'

GOLD ETF
A Gold ETF is an exchange-traded fund (ETF) that aims to track the domestic physical gold price. They are passive investment instruments that are based on gold prices and invest in gold bullion.

Gold ETFs are units representing physical gold which may be in paper or dematerialised form. One Gold ETF unit is equal to 1 gram of gold and is backed by physical gold of very high purity. Gold ETFs combine the flexibility of stock investment and the simplicity of gold investments.

Gold ETFs are listed and traded on the National Stock Exchange of India (NSE) and Bombay Stock Exchange Ltd. (BSE) like a stock of any company. Gold ETFs trade on the cash segment of BSE & NSE, like any other company stock, and can be bought and sold continuously at market prices.

You can buy and sell gold ETFs just as you would trade in stocks. When you actually redeem Gold ETF, you don’t get physical gold, but receive the cash equivalent. You will need a demat account to buy gold ETFs.

Exposure to gold should not be more than 10 per cent

Ideally, you should invest in gold ETFs once you have a well-diversified portfolio of funds and restrict exposure to gold by allocating not more than 5-10 per cent of your total investments.

Investors have become more inclined towards Gold ETFs
Gold-linked ETFs have seen an inflow of Rs 1,028 crore in August. This came following an inflow of Rs 456 crore in the segment in July.

Investor accounts in Gold ETFs climbed by 20,500 folios to 47.95 lakh in August from 47.75 lakh in the preceding month. This shows that investors have become more inclined toward gold-related funds.

The assets under management of Gold ETFs surged over 4 per cent to Rs 24,318 crore in August from Rs 23,330 crore in the preceding month.

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Before that, Gold ETF saw inflow to the tune of Rs 298 crore during the April-June period after three-quarters of consecutive outflow. The category saw a withdrawal of Rs 1,243 crore in the March quarter, Rs 320 crore in the December quarter, and Rs 165 crore in the September quarter.

Gold's appeal as a hedge against inflation continues

 August witnessed the highest monthly inflow into Gold ETFs since April 2022 when the category attracted Rs 1,100 crore on the back of the Russia-Ukraine war.

 
"As the end to the Fed's tightening cycle is now coming close, prospects for gold are looking good. The metal has held its ground despite US yields and the US dollar being on an upward trajectory lately. A potential US recession, central bank gold buying, geopolitical tensions, rising US debt levels are all supporting interest in the precious metal," Ghazal Jain, Fund Manager - Alternative Investments at Quantum Mutual Fund, said.

Moreover, gold prices in recent times have come off from their all-time high levels, thereby providing some buying opportunity, particularly after a sharp rally it witnessed since March this year, said Melvyn Santarita, Analyst - Manager Research at Morningstar India.

"With the continued hike in interest rates in the US, inflation still higher than expectations, and growth rate slowing down, the appeal of gold as a safe haven and hedge against inflation is expected to continue," Santarita added.

 Returns from gold have beaten most other assets

Gold has beaten equities in local currency returns across emerging markets, except India, in the past 23 years, according to DSP Mutual Fund.  The yellow metal’s returns in most emerging market currencies have been 0.4% to 7.9% higher on a compounded basis than their stocks. The only exception has been India with equity returns exceeding that of gold by 0.7%.

Should you invest?

"When investing in gold, you should not consider gold as an investment. Rather you should consider it as insurance to your portfolio so that its value will not go down when any calamity happens. If you have a time horizon of seven to eight years and want to buy gold as a fixed allocation of your portfolio, then I think the finest alternative that has been created for Indian investors is Sovereign Gold Bond (SGB). This is because all the other investment avenues, whether it is a gold fund, ETF, jewellery or even digital gold, have a markup. Even in digital gold, there is a markup of about 100-200 rupees on every 10 grams. It means that when you buy it, you will pay 100 rupees more and when you sell it, you will get 100 rupees less," according to Dhirendra Kumar of Value Research.

Issued by the Government of India, SGB has an eight-year tenure. They give you 2.5 per cent additional interest every year over and above the appreciation of the gold price, which is linked to the market price. So, you get 2.5 per cent additional returns instead of expenses. Also, the capital gains on maturity are exempt. 

" If you have that long tenure and are looking at gold as a fixed allocation in your portfolio, go for SGBs," said Kumar.

Even  Mukesh Kochar, National Head - Wealth, AUM Capital believes that for the long-term SGBs are a better bet.

" We always recommend investing at least 5% of your portfolio in gold. There are many ways to invest in gold. ETFs are without a doubt one of the most popular options. However, if the investment is intended for a long period of time, we prefer SGB investments. This is because SGB offers 2.50% interest per year, which implies your cost of keeping is lowered by 2.50% every year, which ETFs and other gold investment options do not. Furthermore, the return is tax-free if held to maturity, which is not the case with any other alternative. Although these are traded on exchanges, liquidity is limited. Thus, if you want to invest for the short term, gold ETF is a good alternative because liquidity is strong, but if you want to invest for the long term, SGB is better," said Kochar.

Should you go for new or existing SGBs?

According to Value Research's Vishal Goyal, one crucial consideration when looking at these SGBs for investment is whether to opt for newly issued SGBs or those already listed in the secondary market. Always compare the prices of newly issued SGBs with those of existing SGBs with approximately the same maturity period. It's possible that existing SGBs may be trading at a discount.

"However, in the secondary market, it's essential to gauge liquidity if you do not intend to hold the bonds until maturity. Higher liquidity makes selling easier. On the other hand, if you plan to hold the bond until maturity, liquidity becomes less relevant," added Goyal.

Point to note: Regardless of whether you acquire an SGB in the primary or secondary market, capital gains upon maturity are exempt from taxation. But if you decide to sell the bonds within one year, any gains will be added to your annual income and taxed according to your applicable income tax slab. "If you sell the SGB after one year, capital gains will be taxed at 20 per cent after accounting for indexation benefits," said Goyal.



 

First Published: Sep 19 2023 | 10:48 AM IST

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