Gold ETFs have turned into an effective vehicle for investors around the world willing to park their funds in the yellow metal.
Data compiled from the World Gold Council shows that the total physical gold held by Indian gold ETFs almost doubled over the last four years to a record high of 54.5 tonnes as of October 31, 2024. In the same period four years ago, it was 27.4 tonnes.
Escalating geopolitical risks, central bank policy changes, and volatility in the equity market seem to have helped keep up the gold rush.
The segment attracted remarkable inflows from both small and large investors. Data from mutual funds industry body AMFI showed that the domestic gold ETFs received net inflows of Rs 12,448 crore over the last 21 months.
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Gold ETFs are passively managed mutual fund schemes investing in standard bullion with 99.5 percent purity. They track the domestic price of gold closely. These ETFs are available only on stock exchanges and it needs a demat account to buy and sell them.
Gold shines brightest when uncertainty looms
Over the last 15 years, Indian gold ETFs received significant inflows, especially during uncertainties in 2011, 2020 and 2024. Data shows that the domestic gold ETFs added the most about 17, 14 and 12 tonnes respectively in these three years.
"Historically, we have seen increased interest from investors for investment in gold at the time of market uncertainty, central bank policy change and in case of heightened geopolitical risks," Tapan Patel, fund manager for commodities at Tata Asset Management, said.
The peak interest in gold investment in 2011 was due to monetary easing from US Federal Reserve to help the economy wriggle out the 2008 financial crisis. The global markets tumbled in the Covid pandemic year of 2020. In 2024, we again encountered turbulence in the market as an effect of war premium, and consequent policy changes by the central banks in major economies.
The current surge in the gold ETF asset volume is also attributed to the absence of fresh Sovereign Gold Bonds (SGB), higher premium of traded SGBs in the secondary markets, and preference of gold ETFs by multi-asset funds category to allocate to gold assets.
Also see: Why buying Sovereign Gold Bonds in secondary markets may not be a good idea
Above all, gold ETFs turned more appealing after the Union Budget 2024. According to the new tax structure, the gain from the sale of units of gold ETFs will be subject to a capital gains 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.
Gold ETFs are backed by physical gold
Gold ETFs back their assets by buying physical gold. “Gold ETFs invest in gold bullion and track gold’s domestic prices. The funds purchase and sell the precious metal from or to the empaneled authorised participants or bullion dealers whenever is required for unit creation” explains Patel.
The gold is stored at the empanelled bullion vault in the name of the AMC. “As per Sebi regulation, the gold held in physical form against units must be high purity of 995 and above of LBMA (London Bullion Market Association) approved brands and the reference rate should be the benchmark fixation of LBMA price to derive the domestic price of gold,” Patel said.
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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 something to look at only from a returns perspective.
Allocation to gold can form 5-10 percent of your portfolio at any point of time.
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.
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See here: Should you invest in gold funds to hedge your portfolio?
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