In India, based on various cultures and beliefs, gold is purchased on several auspicious days and occasions. One such day is Gudi Padwa which marks the beginning of the new year as per the Hindu calendar. On this occasion, as a sign of ushering in prosperity, people tend to purchase gold. So, this year, if you are planning to buy gold then you may consider buying gold in the form of Gold ETFs.
Apart from gold being a store of value, it is also considered a safe haven. This is because inflation rears its head during uncertain times, which reduces the value of paper currencies. Gold, on the other hand, cannot be devalued like the currency. So, the yellow metal can effectively protect the portfolio against inflation. Its biggest virtue lies in remaining valuable across currencies and geographies.
From an investor’s perspective, gold should be looked at from an asset allocation point of view. The general principle is that one can allocate ~10-15% of a portfolio towards gold. The optimal allocation in one’s portfolio can be decided in consultation with a financial advisor. There are multiple ways in which one can take exposure to gold. Other than physical gold, an investor can consider investing in options like Gold ETFs, gold fund/fund of funds or sovereign gold bonds.
When considered from a portfolio perspective, Gold ETF emerges as an optimal choice. A Gold ETF is an exchange-traded fund (ETF) that aims to track the domestic physical gold price. In other words, buying Gold ETFs means an investor is purchasing gold in an electronic form.
When compared to physical gold, Gold ETFs offer some distinct advantages. To begin with, an investor, need not worry about storage and theft as gold ETFs are held in Demat form. Second, the cost of acquisition is low given the absence of making charges and other related expenses. Third, there is absolute flexibility when it comes to buying and selling.
Since gold ETFs are listed on the exchanges, an investor can carry out a transaction at any point in time during the trading hours. Fourth, there is no lock-in period. Fifth, investors can start accumulating gold even with smaller sums of money. Owing to all these reasons, over time there has been a steady rise in investors’ interest in Gold ETF.
An investor without a Demat account can consider investing in the Gold Fund of Funds. If an investor is planning to meet any future requirement of gold, say a wedding, then such an investor can consider doing a SIP for as low as Rs. 1,000 every month in Gold Fund of Funds. This will enable the investor to collect gold units over a period of time.
So, if you are an investor looking to tap into the investment opportunities that gold as an asset class holds, then taking exposure to the yellow metal through Gold ETFs may be the optimal route. If not, use gold as a portfolio diversification tool and a hedge against uncertainty.
by, Nitin Kabadi, Head – ETF Business, ICICI Prudential AMC