Gold has been a popular investment option in India for centuries, and with the introduction of Gold Exchange Traded Funds (ETFs) and Index Funds, it has become easier for investors to invest in this precious metal. Lets understand what Gold ETFs and Index Funds are, how they work, and their benefits and drawbacks for Indian investors.
What are Gold and Silver ETF and Index Funds?
Gold and Silver ETF Fund of Funds is a fund of funds (FOFs) mutual fund scheme, which invests in Gold and Silver Exchange Traded Funds. Exchange traded funds (ETFs) are mutual funds schemes which track a benchmark market index or prices of commodities e.g. gold, silver.
It is like an open ended mutual fund scheme. You can invest in FOF directly with the Asset Management Company (AMC) or through your mutual fund distributor.
Benefits
Spreading your investments over multiple asset classes (i.e. asset allocation) will diversify / reduce your portfolio risks. Both gold and silver can be used for your asset allocation.
You can take exposure in gold and silver with a much smaller amount by investing in Gold and Silver ETF FOFs
What are Gold and Silver ETFs and Index Funds?
Gold and Silver ETFs and Index Funds are investment vehicles that invest in physical gold and silver respectivly. They are similar to mutual funds in that they pool money from multiple investors to invest in a variety of assets, but they differ in that they invest primarily in gold and silver. Gold and Silver ETFs and Index Funds in India are regulated by the Securities and Exchange Board of India (SEBI). Gold and Silver ETFs available on stock exchanges. Gold and Silver Index funds can be directly purchased from AMC website or through brokers.
How do Gold and Silver ETFs and Index Funds Work?
When an investor invests in a Gold and Silver ETF or Index Fund, they purchase units of the fund, which represent a portion of the total assets of the fund. The value of each unit is determined by the net asset value (NAV) of the fund, which is calculated by dividing the total assets of the fund by the number of units outstanding.
The NAV of a Gold and Silver ETF or Index Fund fluctuates based on the performance of the underlying gold/silver price. When the price of gold/silver increases, the NAV of the fund goes up, and when the price of gold/silver decreases, the NAV of the fund goes down.
Benefits of Gold and Silver ETFs and Index Funds in India
Low Costs: Gold ETFs and Index Funds have lower expense ratios compared to physical gold investments, such as gold bars or coins.
Easy to Buy and Sell: Gold and Silver ETFs and Index Funds can be easily bought and sold on stock exchanges, making them highly liquid and easily accessible for investors.
Diversification: Gold and Silver ETFs and Index Funds provide investors with exposure to gold, which can help diversify their portfolios and reduce overall portfolio risk.
No Storage Costs: Since Gold and Silver ETFs and Index Funds invest in physical gold, investors do not have to worry about the costs associated with storing and securing physical gold.
Drawbacks of Gold ETFs and Index Funds in India
Market Risk: Gold and Silver ETFs and Index Funds are subject to market risk, which means that the value of the underlying gold price can fluctuate based on market conditions.
Management Risk: The performance of a Gold ETF or Index Fund is dependent on the performance of the gold price, which can vary based on economic and political factors.
Currency Risk: Since the price of gold/silver is denominated in US dollars, changes in the exchange rate can impact the returns for Indian investors.
Conclusion
Gold/Silver ETFs and Index Funds are a convenient and cost-effective way for Indian investors to invest in physical gold/silver. They offer benefits such as low costs, easy liquidity, diversification, and no storage costs. However, they also come with drawbacks such as market risk, management risk, and currency risk. By understanding the risks and benefits of Gold/Silver ETFs and Index Funds and selecting funds that align with their investment objectives and risk tolerance, Indian investors can make informed decisions that can help them achieve their financial goals.
