Why Invest in Gold ETFs This Dhanteras: Remember it is a Safe Haven, Not a Money-Making Asset

In the last one-year Gold turned out to be “hero number one” with a return of around 30 per cent which is way higher than what the Nifty 50 managed to deliver. Here we explain for what purpose you should invest in gold this Dhanteras.

With Dhanteras and Diwali approaching gold remains a favored investment symbolising wealth and prosperity.  Gold is deeply rooted in Indian culture, with households holding around 27,000 tons more than the USA, IMF, Switzerland, and Germany combined. India produces less than 1 per cent of its gold needs, and imports add to the country’s bill. Despite this, gold buying remains popular during events and festivals.

In the last one-year Gold turned out to be “hero number one” with a return of around 30 per cent which is way higher than what the Nifty 50 managed to deliver. Here are the reasons why every Indian buys gold whether it is festival or other occasions.

Why Invest in Gold?

Gold is an effective portfolio diversifier, and because it has a low correlation with other asset classes like equities, it helps bring down the volatility in one’s portfolio. It acts as a hedge during uncertain times, often preserving wealth during market corrections, conflicts, etc., with the price of gold moving inversely to inflation, interest rates, and currency depreciation. Gold can’t be created, as in, it’s a rare commodity. According to research, there are only 52,000 tonnes of gold that is yet to be mined, which makes gold pretty valuable. In terms of long-term performance, gold has delivered returns of around 9.18 per cent of CAGR from 1950 to 2023. This is global performance.

What is Gold ETF? Is it worth Investing?

A gold ETF predominantly invests in physical gold & gold-related instruments, as in, the ETF units are actually backed up by physical gold, which is not the case when it comes to SGBs. Secondly, the gold referred here has a purity of 99.5 per cent or higher. Unlike physical gold, which might have different prices in different cities, like 10 grams of gold in Delhi is 77,815 rupees while it’s 70 rupees more in Kochi – so there are distortions but with ETFs you have price parity, so no matter where you are, the price remains consistent.

The ticket sizes are super low, and you can buy gold ETFs for as low as 1/100th of a gram of gold. Since the ETF units are held in demat form, there's no worry of theft, and neither do you need to worry about storage issues. And finally, in terms of transacting, one can buy and sell Gold ETFs during market hours through your trading account, and more importantly, this transaction is without any mark-up or limitations, which is generally a challenge with all other popular alternatives.

The following table shows why Gold ETFs are better than other alternatives:

Do refer to this above comparison, the next time you consider buying some gold.

How is gold valued?

Now, as is the case here, the SEBI has defined some clear guidelines and rules on how gold needs to be valued, and of course, every AMC needs to adhere to that. More specifically, the value of gold is determined on the basis of its price on the LBMA – the London Bullion Market Association – which is also considered the global benchmark.

These prices are subsequently converted into Indian Rupees, and to this, we add – the cost of transportation from London to India, plus notional customs duties, taxes, and any additional levies associated with importing gold into the country. The AMC then appoints custodians to handle the physical gold, who in turn would appoint a vaulting agency to store it safely. Which is exactly why Gold ETFs have an expense ratio that includes the charges around transport, storage, handling, as well as an insurance cover.

In spite of all these expenses, the SEBI has also put in an upper limit of 1 per cent to the gold ETF’s total expense ratio, which is good for investors.

Gold is not a Money-making Asset

Gold is not a Money-making asset because one doesn’t invest in gold to make a lot of money! There are instruments like equities, venture capital, and even real estate, that can do a better job of this, but where gold and gold ETFs really help is when you need it the most.

For example, whenever the equity markets have fallen into hard times, like during the dot-com bubble, the global financial crisis, or recently during Covid, if an investor had some amount of gold in their portfolio, then your landing would have been a lot softer than most others, showcasing gold’s ability to cushion the impact, to protect the downside.

In summary, gold, especially through Gold ETFs, offers a stable, accessible investment with the advantage of being a strong portfolio diversifier. Its low correlation with equities, ease of trading, and consistent pricing make it an ideal hedge against market uncertainty and inflation. Though not a high-growth asset, gold’s role is to preserve wealth, offering protection during downturns and cushioning portfolios from extreme volatility. This Dhanteras, Gold ETFs provide a secure, cost-effective way to invest in this age-old asset with modern convenience.

Disclaimer: The article is for informational purposes only and not investment advice.