Dhanteras, a significant part of Diwali festivities, is traditionally associated with purchasing gold, symbolizing wealth and prosperity. While buying physical gold remains a popular option, many investors now seek to invest in gold through financial instruments such as gold funds or gold exchange-traded funds (ETFs). These investment options offer exposure to the precious metal without the hassle of buying physical gold.
But with both choices available, the question arises: which one should you choose this Dhanteras?
Gold ETFs offer greater liquidity, lower costs, better security than trading physical gold, and can be bought and sold with a single click without any hassle.
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“Overall, gold ETFs offer greater liquidity, lower costs, guaranteed purity and better security than trading physical gold. Since ETFs are traded on stock exchanges like shares, gold ETFs provide greater liquidity compared to physical gold, enabling you to buy and sell gold on a click on a without the hassle of handling physical gold. Additionally, you can invest as low as Rs 20 in gold through gold ETF which is not possible if you choose to buy physical gold,” said Shruti Jain, Chief Strategy Officer, Arihant Capital Markets.“On the other hand, physical gold provides tangible asset experience and can be held directly. However, it comes with challenges of authentication, insurance, storage and risk of theft. This can also turn out to be very expensive if you are holding large quantities of gold compared to ETFs. In 2024, our world is more digital than ever. For investors, opting for Gold ETFs this Dhanteras is a savvy move compared to buying physical gold,” she added.
Another expert mentions that India which imports 85% of the gold faces economic challenges and demand for physical gold affects current account deficit which further contributes to economic imbalances. On the other hand, Gold ETFs mitigate these issues which means an investor can gain exposure to gold without adding to the nation’s physical gold import burden.
Further commenting on which one to choose among physical gold and Gold funds or ETFs, the expert mentioned that Gold ETFs provide a cost-effective solution with minimal expense ratios—typically around 0.5-1%. While buying physical gold remains deeply rooted in tradition and comes with a high cost structure.
“Investing in Gold ETFs offers a modern and efficient alternative to buying physical gold, especially on Dhanteras, an auspicious time when gold purchases surge in India. While physical gold, such as jewelry or gold coins, remains deeply rooted in tradition, it comes with a high cost structure. Making charges on jewelry can range between 10-30%, and storage expenses add to the total cost. Additionally, physical gold lacks liquidity and transparency, often resulting in losses during resale due to price cuts,” said Chakravarthy V., Cofounder and Director, Prime Wealth Finserv.
“On the other hand, Gold ETFs, traded on the stock exchanges like individual stocks, provide a cost-effective solution with minimal expense ratios—typically around 0.5-1%. For instance, the Kotak Gold ETF and UTI Gold ETF, which delivered 1-year returns of 11.4% and 10.7%, respectively, show that ETFs can track gold prices effectively while offering high liquidity. Investors can buy and sell Gold ETFs instantly on exchanges, capturing price movements without delays, which is not possible with physical gold,” he added.
There are around 24 gold funds and ETFs together in the market. Out of these 24 funds, ICICI Prudential Gold ETF has offered the highest return of around 28.11% since last Diwali in November 2023, followed by Kotak Gold ETF which gave 28.08% return in the same period.
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UTI Gold ETF and Nippon India ETF Gold BeES gave 27.91% returns each since the last Diwali. ICICI Pru Regular Gold Savings Fund(FOF) and Quantum Gold Saving Fund delivered 27.42% return each in the same period.
SBI Gold ETF and HDFC Gold Fund gave 27.34% and 27.21% returns respectively since last Diwali. Axis Gold Fund and Aditya Birla SL Gold Fund offered 26.78% and 26.65% returns respectively since November 12, 2023.
After looking at the past performance of gold ETFs, are you interested in making an allocation in these funds? Want to know what allocation to make?
According to an expert, investors should invest in Gold ETFs as a strategic component in their portfolio, especially as a hedge against market volatility and inflation. Investors should allocate 5-10% of their portfolio in Gold ETFs ensuring balanced exposure without over concentration.
“Investors should consider Gold ETFs as a strategic component in their portfolio, especially as a hedge against market volatility and inflation. Gold typically performs well during economic downturns and geopolitical tensions, as seen with current global conflicts, making it a valuable diversifier. Gold ETFs offer benefits such as low transaction costs (0.05 – 0.2), high liquidity, and ease of trading, unlike physical gold which has higher costs and storage issues,” said Chakravarthy V.
“For allocation, a prudent approach could be to allocate 5-10% of one’s portfolio to Gold ETFs, ensuring balanced exposure without over concentration. This allocation provides a cushion during economic uncertainties while maintaining focus on equities, bonds, and other growth assets for long-term wealth creation,” he added.
Another expert believes that including gold as an asset class can help achieve diversification and will be useful during market downturns. One should allocate 5-20% of the portfolio in gold ETFs and hedge against inflation.
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“Diversification is key to a crucial for any investment portfolio. Including gold as an asset class can help achieve this as it’s especially useful during market downturns, as gold prices tend to increase when other assets fall. Moreover, gold has a pretty reliable record as a safe haven in times of market turmoil as seen in the past year. Gold prices have seen a strong surge since last Diwali owing to the rising geopolitical tensions among other things,” said Shruti Jain.
“Having said that, what percent an investor should allocate to gold depends on several factors including their investment horizon, risk tolerance, time horizon and what does their current portfolio look like. It can range anything from 5-20% to diversify your portfolio and as a hedge against inflation,” she added.
Gold and silver funds are used for portfolio diversification. If you have a large portfolio, you can earmark a small percentage of the total portfolio (advisors say around 10%) to invest in gold and/or silver. They are supposed to offer you diversification and add stability to your portfolio in times of economic turmoil.
Gold funds are mutual funds that invest in Gold ETFs or directly in companies involved in mining and production of gold. These are open-ended funds, and the returns are linked to the performance of gold prices. You don’t need a demat account to invest in gold funds, and you can do so directly through mutual fund platforms.
Gold ETFs are exchange-traded funds that track the price of physical gold. Each unit of a Gold ETF is backed by a specific quantity of gold, usually equivalent to one gram. They are listed on stock exchanges, and you need a demat and trading account to buy and sell them.
(Disclaimer: Recommendations, suggestions, views and opinions given by the experts are their own. These do not represent the views of The Economic Tim