While looking to invest in gold as portfolio allocation, gold ETFs prove to be a better option than physical gold
The tradition of buying gold on auspicious occasions is a part of the Indian culture. It is believed that buying gold on Akshaya Tritiya ensures eternal wealth. Separately, the affinity of Indians towards gold can be gauged from the fact that the country is the world’s largest holder of yellow metal. According to the World Gold Council, India is estimated to have accumulated up to 25,000 tonnes of gold till date. In India, an average monthly per capita expenditure on gold and jewellery is close to Rs 500 in urban households and approximately Rs 230 in rural households. This accounts for nearly 23 per cent of the households’ durable purchases. However, in the current lockdown, it is close to impossible to set out to make a purchase of the yellow metal. In such a scenario, an investor can consider another alternative such as the gold ETF which can be purchased from the comfort of one’s home through a website or a mobile application.
Gold ETFs invest in gold bullion which is as good as investing in physical metal but is held in electronic form. One Gold ETF unit in today’s prevailing market rate is around Rs 50 and is backed by physical gold of very high purity. Just like a stock of any company, Gold ETF is listed and traded on the stock exchanges and can be bought and sold throughout the trading hours. So, if you are an investor looking to invest in gold as a part of portfolio allocation, gold ETFs prove to be a better option than physical gold.
What makes Gold ETF an attractive investment option is its following attributes:
Improves Affordability: The cost of investing is much lower than buying, storing and insuring physical gold.
Liquidity: Unlike jewellery, coins or bars, units can be liquidated as per the requirement of the investor. It can be bought and sold at Real-Time NAV (Net Asset value) on exchanges.
Reliable: Gold ETF aims to purchase gold of 99.5 per cent purity or higher.
Diversification: Adding gold to your investment portfolio can be a good way of diversification.
Tax Efficient: It is a tax-efficient way to hold gold as the income earned from them is treated as long-term capital gain. There is a wealth tax, security transaction tax, sales tax, etc.
Collateral: ETFs are accepted as collateral for loans.
No Load: No entry and exit load.
Just like buying, selling too is carried out on the stock exchange. The prices of ETFs surges or dips in sync with the prices of physical gold. When one redeems a Gold ETF, what is received is the cash equivalent and not physical gold. In effect, through gold ETF one can be rest assured of the exposure to yellow metal at a cheaper price and through a safer possible method. Also, when investing through ETFs, there is flexibility to accumulate or sell units in smaller lots as per one's requirement.
Post the recent correction, we are positive on gold on relative valuation with equity and debt. Owing to the global central bank's policies, a spike in inflation is likely and since gold acts as a hedge against inflation, investors can consider around 10 per cent allocation to gold in their portfolio.
The author is Head, Product Development and Strategy, ICICI Prudential AMC
DISCLAIMER: Views expressed are the author’s own, and Outlook Money does not necessarily subscribe to them. Outlook Money shall not be responsible for any damage caused to any person/organisation directly or indirectly.