Why ETF is an ideal way to invest in Gold

The festive season is upon us and Gold will on the shopping list of many families. Apart from its cultural importance in our country as an auspicious metal, Gold is one of the most important investment assets class globally as well as India. Over a long period of time gold is supposed to retain its purchasing power and is therefore seen as a hedge against inflation.

Before we proceed further, we suggest you to read this content what you need to know before you start investing in ETFs?

Why gold in jewellery form is not a good investment?

The traditional way of buying gold in our country is in the form of gold jewellery. Gold jewellery almost always has impurities. Pure 24K gold is too soft / malleable, which makes it unsuitable for making jewellery. If you want a piece of gold jewellery studded with precious stones like diamond, pure 24K is too soft to grasp the stone firmly. Also, if you want intricate designs in your gold jewellery then pure gold is not suitable. So jewellers add small quantities of some other metal usually silver or copper in order to give it a bit more rigidity. When you are buying gold jewellery, you are also paying for the weight of impurity at the same rate as gold. However, if you want to sell gold, the jeweller will melt the jewellery and separate the impurities to get the weight of pure gold. In other words, the weight of impurity will be deducted from the gold price.

The other major drawback of gold jewellery as an investment or asset is making charges. Making charges can vary considerably depending on design and craftsmanship, but it has no investment value; you will only get the value of pure gold. Furthermore fashions always change over time. Many parents start buying gold jewellery for the children’s wedding but by the time of the wedding fashions may have changed. You may have to remake the jewellery again incurring marking charges again. Please note that the jeweller will deduct impurities when remaking the jewellery. In effect, you are paying for impurities and making charges twice. Therefore, purely from a financial standpoint, gold jewellery is not suitable for investment purposes.

Gold ingots, bars and coins

Gold in the form of bars and coins are more suitable for investment purposes because they do not contain impurities and do not involve making charges. Gold in physical form always carries the risk of theft. In order to secure your physical gold (whether in the form of jewellery or ingots / bars /coins), you can store them in bank lockers, but then you will have to incur bank locker charges every year. This cost has to be incurred for many years, till you pass on the gold to your family members e.g. children, grandchildren etc or for your entire life. Even if you pass your gold to your family e.g. children, grandchildren etc, they will have to bear the storage costs.

Gold as a financial asset

Buying gold as a financial asset is ideal for investment purposes. Investors can buy gold as financial asset either in the form of Gold bonds, Gold ETF or Gold fund of funds. Gold as financial asset has the same value of pure 24 carat physical gold. There are no impurities, making charges, risk of theft or storage costs in financial gold.

Gold ETFs

Gold Exchange Traded Funds or Gold ETFs are financial instruments that track the price of pure Gold. Gold ETFs are backed by physical Gold. One Gold ETF unit is equal to 1 gram of gold and is backed by 99.5% pure physical gold bars (source: AMFI, Knowledge Centre, Gold ETFs). Since Gold ETFs have the same value as pure physical gold, there is no cost associated with impurities or making charges. So when you sell the ETF you will get the value of pure gold. The units of gold ETFs will be credited to your demat account; there are no storage costs involved, nor any risk of theft. Gold ETFs are the cheapest and safest way of buying and selling gold.

Benefits of investing in Gold ETFs

• Historical data shows that gold is an effective hedge against inflation, at least in a market like India. The chart below shows the growth of Rs 1 lakh investment in gold over the last 20 years. Your investment would have grown to more than Rs 1 crore at 12.5% CAGR returns (as on 31^st August 2023).
  
  

  

  Source: MCX, Advisorkhoj Research, as on 31^st August 2023. Disclaimer: Past returns may or may not be sustained in the future.



• There is low or even negative correlation of returns between different asset classes. Gold is usually counter-cyclical to equities i.e. gold outperforms when equity underperforms and vice versa (see the chart below). Adding gold to your asset allocation will bring more stability to your investment portfolio.
  
  

  

  Source: National Stock Exchange, Multi Commodity Exchange, Advisorkhoj Research, as on 31^st August 2023. Equity is represented by Nifty 50 TRI, Debt is represented by Nifty 10 year Benchmark G-Sec, gold is represented MCX spot prices of the commodity. Disclaimer: Past performance may or may not be sustained in the future.



• In a market like India, gold can also be a hedge against currency risks i.e. when the INR depreciates, gold tends to appreciate in price because we meet our gold demand through imports.

Suggested reading what are the benefits of investing in ETFs?

How to invest in Gold ETFs?

• You need to have Demat and trading accounts to invest in ETFs. If you do not have a demat account, you can open one with any depository participant (DP); check with your stockbroker. The stockbroker / DP will open a demat account after you submit your KYC documents (e.g. PAN, Aadhaar cards, photographs etc).


• Along with the demat account, the stockbroker will also open a trading account for you, so that you can buy / sell ETFs or other securities through that account. Depending on your requirements, you can get an online trading account (where you can trade online or through mobile app) or you can trade by calling your broker / dealer whereby the dealer will execute the buy / sell order on your behalf.


• You can buy units of gold ETFs at current market price. You should know that the market price of an ETF may differ from the indicative NAV (iNAV) of the ETF. However, for gold ETFs the difference is often quite small.


• There are many gold ETFs listed on the stock exchange. You should select an ETF with low Total Expense Ratio (TER) and high trading volumes. Both factors are important. You should consult with your financial advisor or mutual fund distributor if you need help in selecting the right gold ETF.

You may also like to read ETFs and Index Funds: where should you invest?