In India, based on various cultures and beliefs, gold is bought on several auspicious days and occasions. One of these days is Gudi Padwa which marks the start of the new year according to the Hindu calendar. On this occasion, as a sign of the advent of prosperity, people tend to buy gold. So this year, if you are thinking of buying gold, you can consider buying gold in the form of gold ETFs.
Besides being a store of value, gold is also considered a safe haven. Indeed, inflation rears its ugly head in times of uncertainty, which reduces the value of paper currencies. Gold, on the other hand, cannot be devalued like money. Thus, the yellow metal can effectively protect the portfolio against inflation. Its greatest virtue is that it remains valuable in all currencies and all geographies.
From an investor’s perspective, gold should be viewed from an asset allocation perspective. The general principle is that you can allocate around 10 to 15% of a portfolio to gold. The optimal allocation in his portfolio can be decided in consultation with a financial adviser. There are several ways to gain exposure to gold. In addition to physical gold, an investor may consider investing in options such as gold ETFs, gold funds/funds of funds or gold sovereign bonds.
Viewed from a portfolio perspective, Gold ETF appears to be an optimal choice. A gold ETF is an exchange-traded fund (ETF) that aims to track the price of physical gold in the domestic market. In other words, buying gold ETFs means that an investor is buying gold in electronic form.
Compared to physical gold, gold ETFs offer distinct advantages. For starters, an investor doesn’t have to worry about storage and theft because gold ETFs are held in Demat form. Second, the acquisition cost is low given the absence of manufacturing costs and other related expenses. Third, there is absolute flexibility when it comes to buying and selling.
Since gold ETFs are publicly traded, an investor can make a trade at any time during trading hours. Fourth, there is no blocking period. Fifth, investors can start accumulating gold even with small amounts of money. Due to all these reasons, over time there has been a steady increase in investor interest in the Gold ETF.
An investor without a Demat account may consider investing in the Gold Fund of Funds. If an investor is planning to meet any future gold requirement, say a marriage, then such an investor can consider making an SIP for as little as Rs. 1,000 each month in Gold Fund of Funds. This will allow the investor to collect gold units over a period of time.
So if you are an investor looking to exploit the investment opportunities that gold offers as an asset class, gaining exposure to the yellow metal through gold ETFs may be the optimal route. Alternatively, use gold as a tool for portfolio diversification and as a hedge against uncertainty.
by, Nitin Kabadi, Head – ETF Business, ICICI Prudential AMC