DSP Mutual Fund announced the launch of DSP Gold ETF, an open-ended exchange-traded fund (ETF) that would allow investors to allocate a part of their earnings to gold at the prevailing domestic prices.
The offer is available until April 24, 2023, after which it would be available for continued sale and repurchase within five business days from the allotment date.
Anil Ghelani, CFA, Head – Passive Investments & Products, DSP Asset Managers said, “Just as it is important to have a well-balanced diet for good nutrition, we should consider having a well-diversified portfolio with some gold ETFs.
Gold gives us an opportunity to hedge against a standard ‘equity-debt portfolio’ due to its low correlation with equity and often a negative correlation with debt as an asset class.”
Why look beyond gold ETFs?
The offer comes when the dollar is weakening partially due to the global economic meltdown and the news of BRICS nations working on a new currency to reduce their dependence on the US dollar. Amidst all this brouhaha over finding new investment options or rejigging one’s investment portfolio, does it make sense to invest in gold ETFs?
Rishabh Parakh, Chief Play Officer, NRP Capitals said, “The best time to invest was right when you started working. The second best time is now. Having said that, one should have some allocation to gold though not more than 10 per cent. However, one may gradually increase the allocation depending on one’s financial goals and risk appetite. Gold prices have gone up in recent months; however, you must consider investing for the long term. Also, why buy ETFs only as you may put some of your money in Sovereign Gold Bonds (SGBs) too.”
When gold returns for Akshaya Tritiya are compared over the last ten years, gold has delivered a decent 11 per cent CAGR.
Depending on their risk profile, market participants can invest in gold through a variety of platforms.
However, Dev Ashish, a SEBI-Registered Investment Advisor and Founder (Stable Investor) thinks differently. Ashish explains, “While many investors may be pausing their gold investments in hope of some price correction in near the short term (and better entry prices), many still would be accumulating gold as part of their long-term asset allocation. Having 5-15 per cent exposure to gold can be considered for the long term for conservative-balanced investors. But given the recent change in taxation status of gold ETFs (along with debt funds, international funds, etc.), which will now be taxed as per the tax slab of the individual, gold ETFs have become far less attractive compared to SGBs for the investors who have long investment horizon. So, unless the investment horizon is short term and liquidity is required, it is better to invest in SGBs for small investors.”
Gold is an asset class that holds great strategic importance, serving as an effective hedge against inflation and a strong and safe haven asset. It is also considered an ideal diversification asset class to domestic equities. Given the current climate of risk and macroeconomic uncertainty, gold has been on an upward trajectory for quite some time and is expected to continue its growth.
Anand Dalmia, Co-founder & CBO, Fisdom adds, “This year, considering the macroeconomic environment, the occasion also presents an opportune moment to invest in gold. Recent changes to taxation rules applicable to gains from gold ETFs and gold mutual funds make SGBs a more attractive investment option. However, for investors seeking short-term exposure to gold, gold ETFs offer a cost-efficient and highly liquid alternative. While SGBs require a longer tenure to maturity, gold ETFs provide a more flexible investment option.
Viral Bhatt, Founder, Money Mantra shared, “Gold ETFs are held in a dematerialised format, so an investor need not worry about storage or security issues. Further, gold ETFs have high liquidity, as they can be purchased or sold on the exchanges during trading hours, like stocks. Holding gold can also help one to smoothen his/her investing journey, as gold is an asset class whose prices typically move in a different direction from other asset classes. So, when other asset classes fall, gold ETFs can offer some stability.”
“Also, investments in gold have typically done well at a time when there is a weakness in the dollar. With factors such as a global slowdown, the post-Covid jump in the dollar and expected monetary easing, the dollar is expected to weaken going forward, which could start a favourable market condition for gold,” added Bhatt.
Should you invest in DSP Gold ETF NFO?
With global liquidity drying up and the demand for gold investments coming back, along with the improvement in the central bank's holding, the fundamentals are strong for a bullish gold outlook.
Ravi Gehani, Fund Manager, DSP Asset Managers said, “With the bulk of interest rate hikes likely behind us and continued volatility from global uncertainty, gold prices are expected to see upward movement. With China opening their economy, and India seeing demand going back to pre-covid levels, jewellery and investment demand from the world's two largest gold consumer nations is expected to pick up, building a good case for gold.”
However, the concerns are regarding investments in new fund offers (NFOs).
Though one must put money in time-tested investments instead of new investments on the block, a lot depends on one’s risk profile.
Tanvi Goyal, Founder, Wealth Aware elucidated, “Since the introduction of SGBs, they remain the most favourite option for the investors looking to invest in gold. Putting money in SGBs offers many advantages compared to gold ETFs including the yearly interest pay out of 2.5 per cent along with tax efficiency as the capital gains on SGBs are not subject to tax, although the interest amount continues to be taxed. However, since individual investors cannot invest in more than 4 kg of gold, many HNIs may need to look at other alternatives over that limit. This is when Gold ETFs can make a good option. As ETFs have no upper limit."
She added, "The SGBs have a lock-in period of five years from the bond issue date. Gold ETFs, on the other hand, can be traded whenever the investor desires without lock-in worries so they are highly liquid in nature. When investing in an ETF Mutual Fund, I would highly recommend investors to go for old established funds with at least a three-year performance record and a sizable AUM.”
Investing in gold has its own benefits. Apart from allowing diversification in investments, it is the prospect of decent returns that lures many people to put their money in gold investments.
However, the choice of investment varies, with some preferring SGBs or physical gold over ETFs. In the end, it all depends on how one views gold as an investment and its importance in one’s investment portfolio.