Gold ETFs see record volume on the exchanges YTD, almost double 2023 volumes

Why are gold ETFs so appealing?

Chirag Mehta, CIO, Quantum Mutual Fund, says the absence of Sovereign Gold Bond (SGB) issuances is one reason . “Earlier, there was good participation in gold through SGBs. Currently, no SGB issuance is taking place and most of the series have been trading at premium in the secondary markets. Given that gold ETFs usually trade around the fair values of gold, there is an increasing appetite for gold ETF investment. Convenience, price efficiency, and little worries about purity are also driving participation in gold ETFs”.

See here: No new sovereign gold bonds? Check out the most liquid ones on the NSE

Secondly, the advent of multi-asset funds, which allocate a portion to gold, is contributing to the increased gold ETF volumes, adds Mehta.

Thirdly, gold ETFs are more appealing after Budget 2024. According to the new tax structure, the gain from the sale of units of gold ETFs will be subject to a capital gain tax of 12.5 percent, if held for more than a year. Earlier, irrespective of the holding period, gains were taxed at the slab rates.

Finally, gold ETFs score over SGBs on liquidity as they are actively traded on the exchanges.

Unlike other gold asset classes like ETFs and physical gold, SGBs offer an annual coupon rate of 2.5 percent or 2.75 percent, which is an added advantage for the bonds. SGBs are eight-year instruments, but impose a five-year lock-in. Although SGBs are listed on the stock exchanges, they are thinly traded. However, as an exit window, the RBI provides a buyback facility at the end of the fifth, sixth and seventh years.

Also see: Why are Sovereign Gold Bonds trading at 5-12% premium?

As far as gold ETFs are concerned, investors can buy and sell units at prevailing prices in any working day. Liquidity may not be an issue with many gold ETFs. The daily average volume of the overall gold ETFs on the NSE over the last one month was Rs 136 crore. Nippon India ETF Gold BeES has the largest-traded gold ETFs, with daily average volume of Rs 67 crore over the last one month.

Increased participation from Gen Z investors

Even while corporates dominate holding the larger share in the AUM of gold ETFs, individual investors such as High Net Worth Individuals and retail investors have been making more and more investments in gold ETFs in recent years. According to the Association of Mutual Funds in India (AMFI) data, over 8 lakh folios were added in gold ETFs, YTD.

See here: Chasing Chinese dragons: What's in store for Indian mutual fund investors?

Participation has grown among both new and mature investors. “Both new investors (Gen Z and millennials) and mature investors are participating in gold ETFs through various apps and mutual funds” adds Mehta.

A compelling asset allocation instrument

Gold has been considered as a hedge against inflation and economic uncertainties. Gold should be looked at as an asset allocation product rather than being looked at only from a returns perspective.

Allocation to gold can form 5-10 percent of your portfolio at any point of time.

"Due to the liquidity, convenience, and safety of gold ETFs, they are an ideal way to invest in gold, especially for portfolio diversification,” says Vikram Dhawan, Head Commodities and Fund Manager, Nippon India MF.

For small investors, SIP in gold funds can help ride out the volatility in gold prices without taking on the risk of bad timing. Gold funds are nothing but MF schemes investing in gold ETFs.

Also read: Israel-Iran war: Should you invest in gold funds to hedge your portfolio?

Disclaimer: MoneyControl is a part of the Network18 group. Network18 is controlled by Independent Media Trust, of which Reliance Industries is the sole beneficiary.