Why Gold ETFs should be in your portfolio this Akshaya Tritiya

Gold has been an integral part of Indian culture for ages, with occasions like Akshaya Tritiya considered very auspicious for buying gold.

Since time immemorial, it is believed that buying gold on Akshaya Tritiya, which is celebrated as a festival of wealth, brings good fortune and prosperity to the household. Be it rural or urban, Indians across the country have an affinity for owning gold for reasons such as store of value, corollary to wealth and also due to it being linked to many festivals and rituals.

All of these reasons have played a key role in making the country the largest consumer of gold globally with Indian households owning over 11% of the world’s total gold.

However, this Akshaya Tritiya, instead of buying physical gold, you have the option to buy gold in the form of an Exchange Traded Fund (ETF). There are some distinct advantages of investing in gold ETF along with the benefits of investing in gold.

Gold ETF is a fund that invests in gold bullion of very high purity, so it’s as good as investing in physical gold. But the difference here is that it is held in electronic form in your Demat account.

The ETF units are listed on exchanges and can be bought and sold during market hours from the comfort of your home or office through an Asset Management Company (AMC) website/app or your stockbroker.

Investors can also invest in gold ETF Fund of Funds (FoF) which does not require a demat/trading account i.e. the approach is similar to investing in any other mutual fund scheme.

Apart from cultural reasons, gold has an important role to play in one’s portfolio as that of a diversifier and a hedge against inflation.

Reasons to buy gold ETF

Affordability: The cost of buying gold ETF is very low when compared to buying physical gold. Here, there are no storage or insurance costs attached. Also, there are no leakages like making charges, too.

Convenience: ETF can be bought like an equity share through your trading account. You can buy or sell your gold ETFs whenever and wherever you want. Unlike bars/coins/jewellery that can’t be sold in parts, you can sell gold ETF units in multiples of 1 unit.

Security: Gold ETFs buy gold bullion of only 99.5% purity or above, which takes away the purity concerns.

Efficiency: It is a tax-efficient way of owning gold as income earned from gold ETF is treated as capital gains, which can be short-term or long-term, depending on the holding period. One can borrow against gold ETFs, too, as the units are treated as collateral.

The beauty of gold ETF is that an investor can start investing even with very small sums, unlike physical gold where one needs a sizeable corpus. Also, one can plan to invest smaller sums at regular intervals as a means to accumulate a significant number of units of gold ETF over a period of time.

International gold prices are coming out of a 10-year consolidation. High inflation amidst financial uncertainties due to rising global interest rates and geopolitical tensions are likely to support gold prices going ahead as a safe haven investment. Hence, investors can consider a 10%-15% allocation to gold through gold ETFs and gold ETF FoF in their portfolio.

(The writer is the Head of Product Development & Strategy at ICICI Prudential AMC)