As Dhanteras and Diwali approach, gold continues to be a favored investment, symbolizing wealth and prosperity. Over the past year, gold has emerged as the “hero number one,” yielding returns of around 30%, significantly outpacing the Nifty 50 index. This article explores the reasons behind gold’s enduring popularity in India, especially during festive seasons.
Why Invest in Gold?
Gold holds a prominent place in Indian culture, with households collectively owning approximately 27,000 tons—more than the total held by the USA, IMF, Switzerland, and Germany combined. Despite producing less than 1% of its gold needs, India remains one of the largest importers of this precious metal. The cultural significance of gold drives its popularity as a gift or investment during festivals and special occasions.
Portfolio Diversification
Gold serves as an effective diversifier in investment portfolios due to its low correlation with other asset classes, such as equities. This characteristic helps reduce overall portfolio volatility and acts as a hedge during uncertain times. Historically, gold prices tend to rise during market corrections, inflation, or geopolitical conflicts, preserving wealth when other investments falter. From 1950 to 2023, gold has delivered an impressive compound annual growth rate (CAGR) of approximately 9.18%.
Understanding Gold ETFs
A Gold Exchange-Traded Fund (ETF) primarily invests in physical gold and gold-related instruments. Unlike Sovereign Gold Bonds (SGBs), the units of a Gold ETF are backed by actual gold, with a purity level of 99.5% or higher. Gold ETFs offer several advantages over traditional gold investments:
- Price Consistency: Unlike physical gold, which can have varying prices across different regions (e.g., 10 grams of gold priced at ₹77,815 in Delhi vs. slightly higher in Kochi), Gold ETFs provide price parity regardless of location.
- Low Minimum Investment: Investors can purchase Gold ETFs for as little as 1/100th of a gram of gold.
- Safety and Convenience: Gold ETFs are held in dematerialized (demat) form, eliminating concerns about theft and storage issues. Transactions can be made during market hours without mark-ups or limitations.
Comparison of Gold Investment Options
Here’s a comparison of Gold ETFs with other investment forms:
| Particulars | Physical Gold | Digital Gold | Gold ETF | Sovereign Gold Bond |
|---|---|---|---|---|
| Form of Holding | Bar, Coin, Jewellery | Platform Account | Demat | Certificate or Demat |
| Risk of Theft | High | No Risk | No Risk | No Risk |
| Purity | Risky | High | High (99.5%) | High (24k) |
| Pricing | Differential | Same | Same | Same |
| Tenure | N/A | N/A | N/A | 8 Years |
| Returns | Big Spread in Buy-Sell | Big Spread in Buy-Sell | Lower Than Actual Price | Higher Than Actual Price |
| Interest | N/A | N/A | N/A | 2.5% P.A. |
| Liquidity | At High Cost | High | High | Low |
| Minimum Investment | No Limit | ₹1 | 1 Unit (0.01 gm) | 1 Gram |
| Lock-In Period | N/A | N/A | N/A | 5 Years |
This comparison highlights the advantages of Gold ETFs, making them a compelling option for investors.
How is Gold Valued?
Gold is valued based on prices set by the London Bullion Market Association (LBMA), a global benchmark. The price is converted into Indian Rupees, incorporating costs for transportation, customs duties, and taxes associated with importing gold into India. Asset Management Companies (AMCs) appoint custodians to handle the physical gold, ensuring secure storage through vaulting agencies. Despite associated expenses, SEBI caps the total expense ratio of Gold ETFs at 1%, benefiting investors.
Gold as a Wealth Preservation Asset
It’s important to note that gold is not primarily a high-growth asset. Unlike equities or real estate, gold investments are not aimed at generating significant returns. Instead, they serve as a protective measure during economic downturns. Historical data shows that holding gold can cushion the impact during crises, such as the dot-com bubble and the global financial crisis, providing stability in turbulent times.
In summary, investing in Gold ETFs this Dhanteras offers a secure and convenient way to add gold to your portfolio. While gold may not provide high growth potential, it plays a crucial role in preserving wealth and mitigating risks associated with market volatility. Gold ETFs present a modern approach to investing in this age-old asset, combining the advantages of accessibility, safety, and effective portfolio diversification.
Disclaimer: This article is for informational purposes only and should not be considered investment advice.
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