Gold is one precious metal that lies at the heart of our cultural practices, going back generations. In addition to holding sentimental value, it has also been bought as a hedge against any potentially distressing times. While buying physical gold still holds great value amongst Indians, consumers also have the option to invest in gold via ETFs.
Below we divulge the advantages of investing in gold via ETFs, let us try to understand the concept of ETFs. ETFs, or Exchange Traded Funds, essentially replicate the performance of an index by investing in the underlying composition of the index as closely as possible.
These funds are listed and traded on exchanges and offer investors the ability to allocate to an index in its most granular form.
ETFs have proven to be a favourable option for investors seeking a convenient method for investing in a particular basket of stocks (represented by an index). Since ETFs are traded on the exchange and can be easily brought or sold, they make an interesting investment option for retail investors.
How does Gold ETF work?
When you invest in a Gold ETF, there is an entity at the back-end purchasing gold that also gives you a guarantee about the purity of the gold (exactly like when you buy physical gold). For instance, assume an investor wishes to buy a Gold ETF. In such a case, the entity which is registered on the NSE meticulously follows the latest market cost. NSE allows an ‘Authorised Participant or Member’, generally large companies/firms to handle the purchase and sale of gold to generate ETFs.
For a retail investor to invest in Gold ETF, all he/she needs to do is open a Demat/trading account online by submitting PAN, Aadhar, ID proof, and residential proof. Once that has been verified, he can buy a Gold ETF of his/her choosing and invest in it. The process is as simple as investing in any other ETF. In addition to lower transaction costs and no storage risks, investors are also benefited from higher liquidity and an asset that offers an interest rate hedge.
Some Key Advantages of Gold ETFs
Diversification: A well-defined asset allocation strategy will help investors walk the tight rope between risks, rewards, and opportunities. By diversifying into Gold ETFs, the investor is creating a portfolio that has the potential to take advantage of the various market cycles and the subsequent performance of the asset during it. Since Gold has minimal co-relation to the movement of Equity or Debt in an investor’s portfolio, the ability of the portfolio to compound over the long term is not impacted significantly even in the face of economic headwinds.
Safety: When compared to physical gold, Gold ETFs are surely a safer option. In addition to the fact that it is not present in the physical form for anyone to steal it, it is also protected with the virtue of being pure gold. When one invests in physical gold, one might still be subjected to the impurity of the metal. However, in the case of Gold ETFs, the underlying investments are made in hallmarked gold, thereby eliminating any risk of impurity.
Safe Haven: Gold’s biggest virtue lies in its store value. It is relevant across cultures, geographies, and currencies, making it a natural ‘safe haven’ for investors. During uncertain times, such as the current geopolitical tensions, the value of currencies tends to go down. Since the supply of gold is limited, unlike paper currency, the yellow metal cannot be devalued, making it an attractive asset class, especially during times of uncertainty.
Transparency in Valuation: The valuation of Gold ETF units that an investor holds replicates the gold price movements in the international markets. Thus, at any given point, the investor is aware of the valuation of Gold ETFs in his portfolio. Additionally, the investors may check the real-time valuation of the ETF units on the stock exchanges and further trade at similar rates through the stock exchange mechanism, allowing them to liquidate the investments at market rates.
Better Liquidity: Unlike physical gold, liquidating a Gold ETF could not have been easier! Investors can actually liquidate their investments with a click of the mouse by placing a sell order or through the exchange during trading hours. Once the sell order executes, the ETF units are transferred from the Demat account.
Gold ETFs will soon emerge as one of the most optimal ways to ensure exposure to the yellow metal while planning for future requirements. One need not bet purely on Gold or only rely on it through maybe a Multi Asset Fund. It is imperative that Gold as an asset class forms a certain percentage of an investor’s portfolio allocation. By protecting the purchasing power of the money invested across periods, investors may expect the investments in gold to absorb market volatility during the times of correction.
(The author is Head Products and Alternatives, Axis AMC. Views are personal and not of Mint Genie)