Gold is associated with abundance, positivity and auspiciousness. Buying gold is believed to bring prosperity and luck. This is one of the reasons people wait all year and head to the stores on special occasions such as Diwali to buy the precious metal.
Gold has multiple uses and is most predominantly bought for its aesthetic value as jewellery. However, it also represents financial security and is popularly purchased in the form of bars and coins.
As times change and newer investment options emerge, gold, too, is seeing an evolution.
Virtual forms of gold such as the Gold Exchange Traded Fund (ETF) are gaining traction in the market. You can be a part of this change by investing in gold ETFs over physical gold this Diwali.
Allure of the yellow metal
A gold ETF is a passive fund that invests in gold bullion. It tracks the price of domestic physical gold and is listed and traded on the stock exchange just like stocks.
ETFs are held in a dematerialised form but is backed by very high-purity physical gold. You can buy or sell gold ETFs on the National Stock Exchange and the Bombay Stock Exchange.
Your purchased units are stored in a demat account. Further, you receive the cash equivalent of your units when you redeem them and not physical gold. Investing in gold ETFs can have many advantages.
No storage hassles
Storage is one of the biggest issues with physical gold. Locker fees can be high, and there is always the lingering fear of theft if you keep gold at home.
Gold ETFs eliminate these troubles. Your units are safely stored in a demat account until you redeem them, saving you the hassle of renting a locker or keeping gold at home.
Purity concern
When purchasing physical gold, the purity of the gold is circumspect and so is the authenticity of the seller. However, such a challenge does not arise in the case of gold ETFs as these are backed by gold of 99.5 per cent purity.
Cost-effective
The costs of physical gold, particularly jewellery, can be high, making it harder for you to buy it.
However, the minimum investment for a gold ETF is only one unit of gold. Moreover, there are no entry and exit loads. There are also no premiums or making charges for ETFs as with physical gold.
Ease of transaction
Since gold ETFs are listed on the stock exchanges, they can be bought and sold online anytime during trading hours. This means that you can easily transact either through your broker or even online on your own.
This eliminates the time and energy spent in purchasing/selling physical gold and offers you a convenient way to invest your money.
Collateral for loans
Historically, the security that gold offers has been as important as the aesthetic value of the yellow metal.
This benefit is available in gold ETFs as well as they can be used as collateral to secure a loan. This makes it a valuable asset to own in your hour of need while also benefiting from capital appreciation.
While gold ETFs offer a multitude of benefits, you should be careful of the following:
No physical gold
You do not get possession of physical gold when you invest in gold ETFs. When you redeem your investment, you will receive its cash equivalent, not gold.
Market risk
The price of gold ETF moves in sync with gold prices. So, there can be a temporary fall if global gold prices correct.
However, long-term investors need not worry about the same as we believe the long-term trajectory of the yellow metal looks positive. Hence, you can consider investing in them even with a relatively low-risk appetite.
Gold ETFs can be a good alternative to physical gold, especially if you want to avoid the challenges associated with purchasing and holding physical gold.
The benefits of gold ETFs far outweigh the concerns. So do consider a new-age approach this Diwali by investing in them.
Wishing you all a glittering and joyous Diwali!
The writer is head — product development & strategy, ICICI Prudential AMC
