Investing in gold has always been a trusted strategy for Indians, and with the delay in the government’s Sovereign Gold Bond (SGB) scheme, many investors are turning to Gold Exchange Traded Funds (ETFs) as a strong alternative. Gold ETFs are gaining popularity for their flexibility, liquidity, and stable returns. So far in 2024, trading volumes for Gold ETFs on the National Stock Exchange (NSE) have reached a significant Rs 17,795 crore, almost double the previous year’s Rs 9,002 crore.
But why are investors increasingly choosing Gold ETFs? Let’s explore the reasons behind this trend.
Why Gold ETFs Are Gaining Investor Interest
Gold ETFs are passively managed mutual fund schemes that invest in 99.5% pure gold. Unlike physical gold, you don’t need to store it or worry about safety. Instead, you buy or sell Gold ETF units on the stock exchange, just like shares. All you need is a Demat account to get started.
One of the key reasons for the growing interest in Gold ETFs is the unavailability of fresh SGBs. Since February, the government has not released a new tranche of Sovereign Gold Bonds. This has led to SGBs trading at a premium in the secondary market, discouraging some investors from purchasing them. As a result, many are finding Gold ETFs to be the next best option, offering similar benefits without the premium.
New Tax Rules Boost Gold ETF Popularity
Another factor driving interest in Gold ETFs is the recent change in tax rules. In the Union Budget 2024, the government modified the tax structure for Gold ETFs. Now, if you sell your Gold ETF units after holding them for one year, you will be charged a flat capital gains tax of 12.5%. Previously, capital gains were taxed according to the investor’s income tax slab, which often resulted in higher taxes. This change has made Gold ETFs more tax-efficient and attractive to investors.
Additionally, mutual fund houses have launched several multi-asset funds in recent months, which include gold as part of their asset mix. This has further increased the trading volume and overall demand for Gold ETFs.
Liquidity and Ease of Trading in Gold ETFs
Gold ETFs offer one major advantage over physical gold and Sovereign Gold Bonds—liquidity. You can buy or sell Gold ETF units at any time during market hours. Most Gold ETFs are highly liquid, and you won’t face issues trying to sell them when you need cash.
On average, the daily trading volume of Gold ETFs on NSE has been Rs 136 crore over the last month. Nippon India ETF Gold BeES has the highest trading volume among Gold ETFs, with an average of Rs 67 crore per day. This ensures that Gold ETF investors can quickly convert their holdings into cash without any hassle.
Gold as a Safe Investment Option
Gold has always been considered a safe investment, especially in uncertain times. Whether it’s inflation, economic downturns, wars, or natural disasters, gold’s value remains relatively stable compared to other assets. For this reason, financial experts believe gold should be part of every investor’s portfolio, providing financial security during volatile market conditions.
The increasing interest in Gold ETFs is not limited to older investors. Even younger investors are starting to realize the long-term value of gold. As they look for safe investment options with stable returns, Gold ETFs are proving to be a smart choice.
Experts Recommend 5-10% Gold in Your Portfolio
Investment experts generally advise that gold should make up about 5-10% of an investor’s portfolio. For those who cannot invest a lump sum in Gold ETFs, systematic investment plans (SIPs) in gold funds are a great alternative. Gold funds invest in Gold ETFs and offer the benefit of rupee cost averaging, so you don’t have to worry about short-term price fluctuations.
SIPs in gold funds allow you to spread out your investment over time, reducing the impact of market volatility. This way, you can gradually build up your gold holdings while enjoying the potential for long-term returns.
Gold ETF Returns: Impressive Performance Over Time
Gold ETFs have delivered impressive returns in recent years. Currently, there are 17 Gold ETF schemes available in the market. On average, these schemes have provided a one-year return of over 29%. Over three years, the average return has been around 17% per year, while the five-year average return is approximately 13.59% annually.
Given the recent rise in gold prices, many experts predict that Gold ETFs will continue to deliver strong returns, making them an attractive investment option for the foreseeable future.
Disclaimer: This article is for informational purposes only and should not be considered as financial advice. Consult your financial advisor before making any investment decisions.
