Should You Consider Gold ETFs This Dhanteras 2024?

Gold exchange traded funds or ETFs have become a popular investment option for many people looking to add gold to their portfolios. In fact in September 2024, gold ETFs saw net inflows for the fifth month in a row, a trend not just in India but worldwide. This increase in interest can be linked to recent changes in US interest rates and growing geopolitical tensions, which have encouraged investors to seek safe haven assets like gold.

According to a report from World Gold Council (WGC) the total assets managed by gold ETFs worldwide grew by 5% reaching $271 billion. Additionally, the total amount of gold held in these ETFs rose by 18 tonnes bringing the global total to 3,200 tonnes by the end of September 2024.

Gold ETFs in India

In India, gold ETFs have shown consistent growth. Apart from two months March 2023 and April 2024 Indian gold ETFs have recorded net inflows for the last 20 months as reported by the Association of Mutual Funds in India (AMFI). As of 30 September 2024, the assets under management (AUM) of Indian gold ETFs stood at ₹39,824 crore indicating a strong interest among Indian investors.

Performance of Gold ETFs

Gold ETFs in India are essentially mutual fund schemes that invest in gold bullion with a purity of 99.5%. They closely track the domestic gold price and currently there are 17 gold ETFs available in the market. The top three gold ETFs in terms of AUM are:

1. Nippon India ETF Gold BeES
2. HDFC Gold ETF
3. SBI Gold ETF

Recent findings from ICRA Analytics highlight a growing trend in gold ETF investments, especially as Dhanteras approaches. Since the beginning of 2024 inflows into gold ETFs have surged by 88% amounting to ₹1,232.99 crore in September 2024 up from ₹657.46 crore in January.

The popularity of gold ETFs is attributed to their high liquidity, transparency and strong correlation with global gold prices. The increase in fund inflows is remarkable with a massive rise of 2,695% from ₹44.11 crore in September 2019 to ₹1,232.99 crore in September 2024.

Return Performance

1-Year Average Returns: Approximately 29.12%
3-Year Returns: 16.93%
5-Year Returns: 13.59%

According to ICRA, LIC MF Gold ETF delivered the highest returns over the past year, three years and five years at 29.97%, 17.47% and 13.87% respectively. While these figures are slightly lower than physical gold’s average returns (30.13%, 18.03% and 14.88%) gold ETFs still present a compelling investment option.

Why Choose Gold ETFs?

Investors are increasingly turning to gold ETFs because they offer several advantages over physical gold including:

Liquidity: Gold ETFs can be easily bought and sold on exchanges.

Transparency: The performance and pricing are clear and visible.

Cost Effectiveness: They generally have lower costs associated with buying and storing gold compared to physical gold.

With escalating geopolitical tensions the demand for safe haven assets like gold is rising. As a result many investors prefer gold ETFs over physical gold as they eliminate the hassles of storage and security.

Is Now the Right Time to Invest in Gold ETFs?

Ashwini Kumar, Senior Vice President and Head Market Data at ICRA Analytics suggests that investors are leaning towards gold ETFs for their liquidity, transparency and ease of trading. He notes that the anticipation of an interest rate cut by the U.S. Federal Reserve could further stimulate interest in these funds.

Kumar advises that investors with a short to medium term outlook should consider investing in gold ETFs. He recommends a buy on dips strategy, which means purchasing more when prices temporarily decline. Given the mixed trends in the equity market, a modest allocation to gold can serve as a hedge against inflation and market volatility, helping to balance overall investment risks effectively.

Conclusion

India is expected to remain the second largest gold consumer in the world following China. With the government's recent reduction of import duties in July 2024, demand for gold is anticipated to rise during the festive season. However, there are concerns about how high gold prices might affect buyer sentiment, potentially limiting the purchasing power of many investors.

Investing in physical gold carries risks such as storage, theft, and concerns about purity which can impact returns. In contrast gold ETFs offer a safer, more regulated investment option that allows for real time trading. As you celebrate Dhanteras and Diwali consider whether investing in gold ETFs might be the right choice for your investment strategy this festive season.