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An Exchange Traded Fund (ETF) as an asset class is relatively new to India, and a vast majority of Indians are still unaware of it.
But Gold ETFs are becoming very popular, as it allows investors to purchase and hold gold electronically.
Also Read: Various mode of gold investment
Investing in ETF is amongst the best and smartest way to invest in gold for a number of reasons.
When you buy Gold ETF, you do not need to worry about its purity, safety, buying in small denominations and other problems associated with physical gold.
What is an ETF?
Exchange traded funds (ETF) are passively managed instruments which directly tracks an asset or an index and the returns are generated based on the underlying asset or index.
What is a Gold ETF?
Gold ETFs are passively managed investment fund which invest in gold bullion and tracks the prices of gold. It’s a simple investment product which combines the simplicity of gold investment and flexibility of stock investment.
It is traded on major stock exchanges including Mumbai, London, New York, Zurich etc. These ETFs trade on the National Stock Exchange’s cash market just like any other stock and it can be bought and sold at the market prices.
You can invest in Gold BeEs, an open-ended passively managed Exchange Traded Fund (ETF), that closely correspond to the returns provided by the domestic price of gold. This is how Nifty BeEs has performed in the last decade.
Why invest in gold ETF?
Gold ETFs are mutual fund schemes which provide an efficient platform for small investors to invest in gold.
Some of the key benefits to investing in ETF are stated below-
1. Lower expense
Due to its unique creation mechanism, they have a lower expense as compared to physical gold.
Moreover, owning gold ETF also is cheaper than owning physical gold because it has no cost of carrying (i.e. cost of storing physical gold)
2.Hedge against inflation
The inclusion of gold in your portfolio provides a cushion against inflation.
3. Safe haven
During any financial distress, it acts as a safe haven.
When US market collapsed in 2008, people shifted their investment in gold and let me tell you, it has kept the trust of people.
4. Diversification benefit
Investment in gold serves as an alternative asset which is not directly correlated with traditional assets and thus providing diversification benefit.
5. Purchase cost
A very low commission is charged for trading in gold ETF which is around 0.4-0.5% (almost equivalent to brokerage charge) along with a very nominal annual storage fee.
However, in case of physical gold, the markup can be as high as 10-20%.
Moreover, investment in ETF is cheaper since it has no cost of carry (i.e. cost of storing physical gold).
Safety is of utmost importance which is often associated with physical gold.
These ETFs are a perfect way of investments since the problem of storage is also taken care of since ETFs are stored electronically in a demat form.
7. Small denominations
Gold ETF is very suitable especially for small investors as you can purchase as small as one gram which we generally not do while buying physical gold.
Gold shares a very low correlation with equity so whenever there is some trouble in the economy, you’ll find gold spiking up.
In other words, it shares an inverse relation with equity.
In the last decade, it had rallied from Rs 8000 to Rs 31000 per 10 gm giving a CAGR of 14.51%.
The yellow metal witnessed a steep rally since the stock market crash in 2008 and since then it never looked back.
After the crash, the US Federal Reserve pumped in $100 billion in the economy in just 18 months in its bond-buying programme or “Quantitative Easing”.
This created very high liquidity in the market of the yellow metal which boosted its price drastically.
Moreover, falling interest rates and depreciation of US dollar helped in pushing its price to record high level between 2010 and 2013.
A message to every parent
I would suggest every parent invest in gold ETF systematically every month as soon as their child is born.
The reason being that by the time their kids are eligible for marriage, they don’t feel the pinch of buying the gold ornaments as it is customary in Indian weddings.
You do not need to worry about timing the market.
Moreover, it is very light on your pocket and also provides the benefit of rupee cost averaging.
How much gold should be there in your portfolio?
I believe that If you are a conservative investor or an investor seeking a moderate risk, you can include 10% of gold in your overall portfolio.
However, for high risk-seeking investors, 5% investment in gold would be an appropriate choice.
How to trade in Gold ETF?
It’s very easy to trade in gold ETF where you just need to have an online trading account to buy or sell at any time.
There are a number of Gold ETFs in India, and complete lists can be viewed on various financial sites.
The Investment in gold is very prevalent in India from the days of our forefathers and holds importance even today.
I believe adding gold in your portfolio systematically over the years would be a right choice since it not only helps to fight inflation but also acts a safe haven during any market collapse.
However, these days the mode and the vehicle of investment has undergone a rapid change due to advancement in technology and finance.
Hence just reading the blog would not help but go forward to start investing in gold in a disciplined way.