​​Gold ETFs: Glowing in the dark

The Covid-19 pandemic has disrupted economic activity world-over. Lockdown restrictions and the sharp volatility in equity markets have severely dented risk appetite of investors, who are desperately seeking for relatively ‘safe haven’ options. One such asset class is gold.

Gold has always been the go-to investment product during market or economic downturns. Given its low correlation with other asset classes such equity and debt, it helps to mitigate risk and acts as an effective portfolio diversifier during times of uncertainty. For instance, gold gave spectacular returns during the 2008 global financial crisis and the 2011 euro zone debt crisis. The latest pandemic is proving no exception (see chart below).

Gold shines brighter when the going gets rough


Notes: Equity returns calculated for Nifty 50 Index; gold returns represented by the CRISIL Gold Index;

Calendar year returns for 2008 and 2011

2020* - Returns are calculated on year till date basis from December 31, 2019 till June 16, 2020

Source: CRISIL Research

Traditionally, physical gold (jewellery, coins and bars) is the most cherished commodity in India. In this form, however, it carries the risk of theft, and hassles of impurity, making charges, prices volatility, etc. That’s where gold exchange traded funds (ETFs) come in. Gold ETFs offered by mutual funds are a convenient way of investing in gold through the electronic route.

What are gold ETFs?

Gold ETFs are mutual fund schemes investing in standard gold​ bullion (99.5% purity).​ The objective is to provide returns which, before expenses, closely correspond to returns provided by the price of gold in the domestic market. There is no lock-in period and no upper ceiling; minimum investment in gold ETFs is one unit - that is equivalent to one gram of gold. Investors get the units in their demat accounts of the ETFs, which are listed and traded on a stock exchange. Hence, they can be bought and sold like stocks on a real-time basis.

Gold ETFs have numerous advantages…

Affordability - Gold ETF​​s are affordable and ideal for retail investors as they can buy gold in smaller quantities. Investment in gold ETFs can be done either lu​mp sum or regularly via systematic investment plans

Purity of gold - Gold ETFs guarantee the purity of gold, which is not the case with retail physical gold

Elimination of fear of theft – They are issued in the demat form and investors need not store them, taking away worries of theft

Liquidity and transparency in prices - They have high liquidity as they can be easily bought and sold like any other stock on the exchange. Prices of gold ETFs are quoted on exchanges, thereby making the process transparent

Portfolio diversification – Gold can lend a good balance to the portfolio enabling to optimise returns and reduce the overall risk, given its very low correlation with other asset classes such as equity and debt. Gold ETFs can be one such avenue which can facilitate diversification

​​​Tax benefit for long term investment - Gold ETFs are taxed as per non-equity funds. The long long-term capital gains (LTCG) is taxed at 20% post indexation after three years. The short-term capital gains (STCG) for a holding period of less than three years is added to investors’ income and taxed as per individual tax slabs. There is no wealth tax levied on gold ETFs

Apart from these benefits, this safe haven category has given stellar returns over both, the short and long term horizons. Average absolute returns of the gold ETFs was 24% and 42%, respectively over the 6-month and 1-year period ended June 16, 2020. Over a 3-year horizon too, it managed to do well with an average annualised returns of 17%.

1Total of 11 gold ETFs are considered for analysis, Source: CRISIL Research

…but invest according to risk-return profile

The popularity of gold ETFs in recent times can be seen in the strong inflows of Rs 3,071 crore in the last six months till May 2020, taking the category’s assets to Rs 10,102 crore in May 2020 from Rs 5,540 crore in November 2019.

Recent months have seen a sharp jump in gold ETF assets


Source: AMFI

However notwithstanding the rise in popularity as a hedge during volatile times, investors should invest in gold as an asset class based on their risk return profile and financial plan chart.

Systematic investing is a good option for the longer term which you available under Gold FOF which invests in Gold ETF. The myriad merits and popularity of gold ETFs in the current difficult times aside, do not forget to make some essential checks before investing. For one, investors need to evaluate the tracking error, which monitors how the fund has mirrored the underlying benchmark, viz., gold. Two, it is important to gauge the impact cost of the ETFs, which is the cost of executing a transaction on the exchange.

That said, with no end to the pandemic in sight, gold ETFs could continue alluring investors for some time to come.

Disclaimer: Any comparison/data mentioned in this material is for general information only and not intended to be relied upon as investment advice and is not a recommendation, offer or solicitation to​ buy or sell any securities or to adopt any investment strategy. Information and content herein have been provided by CRISIL Research, a Division of CRISIL Limited, and is to be read from an investment awareness and education perspective only. Recipient are advised to seek independent professional advice before making any investments. The views / content expressed herein do not constitute the opinions of SBI Mutual Fund or recommendation of any course of action to be followed by the reader. SBI Mutual Fund / SBI Funds Management Private Limited is not guaranteeing or promising or forecasting any returns. The investor will be bearing the recurring expenses of the Scheme, in addition to the expenses of underlying scheme.

Mutual Fund investmen​ts are subject to market risks, read all scheme related documents carefully.​

Mutual Fund investments are subject to market risks, read all scheme related documents carefully.
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