Gold ETF Inflows Rise Four-Fold: Should You Invest?

Are you attempting to diversify your portfolio with gold holdings? Do you want a hedge against inflation over the long run? You may consider investing in Gold Exchange Traded Funds or Gold ETFs. It is an open-ended mutual fund scheme that tracks the price of physical gold in India. Experts recommend that you have at least 5%-10% of your investment portfolio in gold.

You could consider diversifying your portfolio with Gold ETFs instead of physical gold. AMFI data shows investors infusing around Rs 6,919 crore in Gold ETFs in FY 2020-21. It is four times higher than the Rs 1,614 crore invested in FY 2019-20. You could put this down to the panic caused by the rapid spread of Covid-19 across the globe. Should you invest in Gold ETFs?

What are Gold ETFs?

Gold ETFs are commodity-based mutual funds that track the price of physical gold. It is a passive investment that invests the bulk of the assets in gold bullion. 

You have units of the Gold ETF representing physical gold in the dematerialised or electronic form. It means one Gold ETF unit represents one gram of gold. 

You have Gold ETFs traded on the stock exchange, such as NSE and BSE. It helps as you can buy and sell Gold ETFs in a similar manner as stocks. You can access gold investments and also avoid the hassles of storage and making charges. 

Gold ETF inflows rise four-fold: Should you invest?

You have investors pumping Rs 6,919 crore in Gold ETFs in the previous financial year. It is because of the fear of uncertainty surrounding the coronavirus pandemic. You have the prices of gold rising during a significant global crisis as investors rush to a haven investment. 

Retail investors prefer equity investments rather than gold when the economy is doing well. For instance, the safe-haven Gold ETFs witnessed outflows of Rs 775 crore in FY 2016-17, Rs 835 crore in FY 2017-18 and Rs 412 crore in the financial year 2018-19. However, you have investors rushing to put money in gold during periods of heightened risk as they seek a stable investment. 

According to the rule of thumb, you must have around 5%-10% of your investment portfolio in gold. Moreover, it would help if you had gold holdings for your portfolio’s stability rather than high returns in the short run. You may invest in Gold ETFs to boost your investment portfolio if it lacks the requisite proportion of gold holdings. However, you may avoid Gold ETFs if your investment portfolio has more than 10% gold holdings. 

You could invest in Gold ETFs through the systematic investment plan or the SIP. It is a facility offered by AMCs to invest fixed amounts periodically in a mutual fund. You can stagger your investment in gold over some time and average out the purchase cost. It would help if you reviewed your investment portfolio once every six months to check if you have the correct asset allocation in gold. 

You may consider investing in Gold ETFs with a long-term horizon to maintain your portfolio’s stability. It helps as retail inflation measured by CPI (Consumer Price Index) was 5.52% in March 2021. You have rising inflation and falling interest rates of bank fixed deposits propelling investors towards Gold ETFs. 

How to choose a suitable Gold ETF?

• You must select a Gold ETF with high trading volumes and lower tracking error. It is the difference between the returns from the Gold ETF and the target index.
• Choose a Gold ETF with a lower expense ratio. It is the cost of managing the mutual fund.
• It would help if you picked an asset management company (AMC) with significant assets under management (AUM). It bears the sudden redemption pressure by large investors.
• You must study the mutual fund house’s track record and the fund manager over some time to pick the proper Gold ETF.

You will find the gold prices rising during a global crisis. It would help if you invested in Gold ETFs through SIPs rather than rush to purchase when prices are high. Moreover, you must invest in Gold ETFs to diversify your portfolio rather than for short term profit. In a nutshell, invest in Gold ETFs to gain the requisite exposure to gold holdings in your investment portfolio. 

For any clarifications/feedback on the topic, please contact the writer at cleyon.dsouza@cleartax.in