Why Invest in Gold through Gold ETF?
Gold is generally regarded as a natural hedge to inflation and currency depreciation. The recent volatility in the global financial markets has brought the focus back to the yellow metal as an investment option. The recent outperformance of Gold against the market corrections in equity and uncertainty around the financial markets has made it a lucrative investment option. Gold has generated around 50% returns over the past one year, while three-year returns have also been impressive at approximately 23% as of 31st Aug 2020.Source – MFI Explorer
Further, with the financial markets evolving, investing in Gold is not limited to investing in gold jewelry or buying gold bars, etc. Instead, one may consider buying Gold mutual funds or Gold ETFs (Exchange Traded Funds), etc. Such products provide a convenient investment option for investors. This article aims to discuss Gold ETFs as an investment option for investors considering investment exposure to Gold.
What is the Gold ETF?
Gold ETF is an investment product that invests in the underlying commodity, i.e., Gold, on behalf of its investors and generates returns based on the movement in the gold prices. Gold ETF units may be traded on stock exchanges, and the investors may hold such units in Demat accounts.
Why invest in Gold ETF?
Investing in Gold through Gold ETFs provides following benefits as against investing in physical gold:
1. Ease and Convenience
The investors may buy and sell Gold ETF units with a click of the mouse, wherein the transactions are traded through stock exchanges on a real-time basis. No security & storage costs – While the investors hold such units in demat accounts, the mutual fund's underlying investment in physical gold is also made.
As such, the ETF valuation is backed by the actual investment in Gold and, thus, mitigates default risk. The investment in Gold ETF units continues to be digital in demat accounts, and the investors need not worry about the safety & storage of the investment in Gold.
2. Transparent Pricing
One may trade in stock exchanges on a real-time basis, wherein the investors may see the market depth, i.e., buy and sell orders placed by different investors. Further, such prices will tend to move in line with the gold prices in the international markets, as the investments are backed by physical gold.
Further, one may track their investment valuation as well on a real-time basis, and such investments may also be liquidated at around the same prices subject to the demand at the stock exchange floor. In contrast, if one has invested in physical gold, the transaction pricing is contingent upon the fairness of the other party.
3. No Risk of Impure Gold
When one invests in physical gold, there remains a risk that Gold's purity may be compromised, as the quality of trade depends upon the wide-spread market participants. Such impure gold may provide lower realization when one tends to liquidate such investments or utilize the investments in making gold jewelry etc. Such impurity risk is eliminated in Gold ETFs as the investment in underlying gold is made with recognized vendors only after professional due diligence and quality checks for internationally acceptable hallmarked Gold.
While it is prudent to diversify the investment portfolio through Gold, the principles of diversification must always be remembered.