Akshaya Tritiya 2022: How Gold ETFs became retail investors' favorite in last two years Gold ETFs track the domestic price of gold closely. They are traded on the NSE and BSE just like equity shares are. Investors can buy and sell them at any time during the market hours, using their demat account
May 03, 2022 / 10:28 AM IST
Gold Exchange-Traded Funds (ETF) have become increasingly popular over the past two years. More investors now understand the importance of diversifying their portfolios beyond equity and debt. Gold and international equities benefitted from this awareness. Besides, increased market volatility in the months leading up to Covid-19 outbreak also led to gold prices going up. As a result, more investors started investing in gold ETFs. Its status of a safe haven also makes it a preferred choice during market and economic uncertainties like Covid-19 pandemic, and more recently the Russia-Ukraine war. On this Akshaya Tritiya 2022, let us look at how gold ETFs have added value to our investments over the years and why they have become so popular. Gold ETFs track the domestic price of gold closely. They are traded on the NSE and BSE just like equity shares are. Investors can buy and sell them at any time during the market hours, using their demat account.
Gold ETFs found favour among retail investors as the total number of accounts in the category went up sharply and consistently. Over the last two years, more than 37 lakh retail investors’ folios were added.
Although Sovereign Gold Bonds (SGBs) are often considered to be the best way to invest in gold (government guarantee and an assured interest payment of 2.5-2.75 percent per annum), they are mostly illiquid in the secondary markets. Here’s where Gold ETF scores. Gold fund of funds (FoFs) which invest predominantly in gold ETFs, provide liquidity like normal mutual funds. Further, gold FOFs allow you to invest through a systematic investment plan (SIP) as well. This has attracted more retail investors, which has also led to a growth in the assets managed by gold ETFs.
Gold has proved to be good diversifier. In the past three years, gold has given good returns and cushioned investors against volatility in equities and falling interest rates that have led to poor returns from fixed income instruments. Gold may not be an outperforming asset class at all times, but it works as a hedge against market uncertainties and a useful portfolio diversifier.
Dhaval Kapadia, Director – Managed Portfolios, Morningstar Investment Adviser India says, “Gold prices were range-bound for much of the past year prior to the Russia-Ukraine war. Since Feb 2022, gold prices witnessed a sharp uptick buoyed by its safe-haven demand amid increased risk-aversion owing to geopolitical tensions, surging global inflation and concerns over slowing global growth amid supply-chain disruptions. Depreciation of the rupee vis-à-vis the USD also boosted domestic prices to some extent”. While commenting on the outlook of gold price, Kapadia says, “gold is likely to find support over the near term supported by geopolitical tensions, the likelihood of a stagflation scenario (low growth and high inflation) and on recovering local demand. However, this could be overweighed by aggressive tightening by major global central banks to tame the persistently high inflation, and a de-escalation in geopolitical concerns could lead to a decline in risk-aversion weighing on gold prices”.
Gold FoFs invest in their own gold ETFs. The good part about gold FoFs is that they allow systematic investment plan (SIP). Apart from the operational structure, there is no much difference between gold ETF and gold FoF. It’s easier also to buy/sell gold FoF at the prevailing net asset value (NAV) at any time. Some of the gold FoFs with lower expense ratio are Nippon India Gold Savings Fund (an MC30 schemes), SBI Gold and Invesco India Gold Fund.
Ghazal Jain, fund manager, alternative investments, Quantum MF, says, “The asset class has stayed true to its nature by providing investors much needed diversification and inflation protection amid the financial market volatility induced by the pandemic, higher inflation and geopolitical tensions over the last 2 years. Time and again after a crisis, we have seen that investors start considering a strategic portfolio allocation to gold and this time was no different. Domestic gold ETF AUM has doubled from about Rs 8,000 crore in 2020 to Rs 19,000 crore now. This higher buying interest has translated into higher trade volumes for gold ETFs on the exchanges."
Gold may not be an outperforming asset class but can be a hedge against market uncertainties and a useful portfolio diversifier. It can account for 5-10 per cent of your portfolio at any point of time. In our MC30, we recommend Nippon India ETF Gold BeES (Gold BeES) under gold ETF category.
Gold ETFs and Gold FoF are having similar tax implications. Redemption of gold ETFs will attract a long-term capital gains tax of 20 percent (for a holding period of more than 36 months). But if you sell these ETFs before 36 months, then you have to pay short-term capital gains tax at your slab rate.