Gold as an asset class needs no introduction. It is often touted as “store of value” i.e. over the time it retains its value or purchasing power. Historically, Gold has been used as potential hedge against inflation. Further, as they say “when going gets tough in financial market, gold gets going” i.e. historically at the time of economic distress or geopolitical tension, gold had been a preferred premier safe haven instrument.
As on Sep 30, 2024, in terms of performance domestic price of Gold (MCX gold) has generated reasonable return. For instance, over last period of 15 Yr. MCX Gold has generated return of 11.1% CAGR whereas Nifty50 has generated return of 12.9%. In short-term, such as over 3-year period, it has generated return of 18% vis-à-vis 14.9% of Nifty50. Over the long run, Gold has exhibited low or even negative correlation with Nifty 50 and helps in risk mitigation. Though investors should note that in the short term, correlation may or may not hold. For example, while in 2008 and 2011, when Nifty 50 gave negative returns, Gold posted strong positive returns, but both the asset classes were negative in year 2015. At current levels, while Gold may not deliver exuberant returns in short term, investors should approach it for portfolio completion and risk mitigation with longer investment horizon with a strategy to buy at Dips or in staggered manner. Backed by reasonable performance, risk mitigation and being a safe haven, investors are naturally inclined to allocate some portion of their portfolio to gold and use gold for prosperity in their wealth creation journey.
However, in terms of avenue, investors tend to face challenge. For instance, for investment, if they purchase physical gold in form of jewelry, bar or coin, they run into risk of purity along with storage risk & cost. Further, physical gold involves making charges which drags down the returns. Lot of these drawbacks of holding gold in physical from has been taken care in Sovereign Gold Bond Scheme (SGBs). SGB comes with a tenor of 8 years but can be redeemed after 5 years. In addition to possible gains due to gold appreciation, you also earn interest at fixed rate. Thus, making SGBs a very good option for buy and hold investors. However, it comes with its own set of challenges, first and foremost is the lack of secondary market liquidity on exchange. Second one that you are tied to the redemption date, if around the redemption date the gold prices are impacted negatively, you would be forced to liquidate at that price as you can’t defer the redemption beyond the maturity period. In addition to that the redemption of SGB’s is exempt from capital gains only and only if you hold it till maturity, any prior liquidation will attract taxation. Lastly, there is no assurance that government will keep on issuing SGBs.
This is where Gold ETFs come in. Gold ETF is an Exchange traded fund that is easily tradable on stock exchanges. Since, their introduction in 2003, gold ETFs have reduced total cost of ownership, increased efficiencies, provided liquidity and access. Worldwide, the assets under management (AUM) of gold ETFs stood at US $271 billion and collective holdings climbed to 3,200 tonne by the end of September 2024. In India as well, as of September 30, 2024, the Indian gold ETFs had an AUM of Rs 39,824 crore (US $ 4.75 Bn). In India, Gold ETFs are backed by 99.5% purity or above LBMA certified Gold Bar. Further, entire process is institutionalized leading to greater transparency and minimizing the risk. Ample liquidity is available and provided on exchange, leading to entry and exit as per investor convenience and there is no exit load. Further, there is no limit in terms of amount, you can buy as less as 1 ETF Unit. In terms of taxation as well, Gold ETF enjoys 12 month holding criteria to quality for long-term capital gains taxation. The cost of owning a Gold ETF is also relatively low.
Thus, while wealth prosperity can be attained through purchase of gold, it need not be always in form of glittering instrument. As far as investments are concerned, Gold ETFs and Fund of Funds provide focused exposure to the precious metal at a low cost, with no storage and purity risk, at low ticket size with reasonable liquidity on stock exchange.
(The author Siddharth Srivastava is Head – ETF Product & Fund Manager, Mirae Asset Investment Managers. Views are own)