With the MUTANT corona virus variants and social distancing protocols still in place, the festive season might be muted for the second year in a row. However, Indians have continued with the tradition of buying gold during the festive and wedding season. This is because we have understood the intrinsic value of the yellow metal and gold’s capacity for long-term store of value.
Invest in gold digitally
A safer way to invest in gold in the new normal might be to invest digitally. One of the innovative ways to invest in gold digitally is a Gold ETF (Exchange Traded Fund). A Gold ETF has several advantages over physical gold. Firstly, it does away with pricing markups due to making charges associated with physical gold. You do not have to go through the hassle of finding adequate storage and pay hefty locker charges. The fund takes care of all these things. Gold ETFs track the domestic price of gold and are backed by physical gold.
Various forms of investing
Since gold prices have corrected from the highs touched in 2020, you can use the correction to build your allocation to gold. We believe that the fundamentals that uphold long-term value continue to remain strong. Gold ETF has several advantages that surpasses physical gold and other forms of gold investments.
To elucidate, here’s how Gold ETF compares to two popular digital assets in gold: Sovereign Gold Bond and digital gold. In gold ETFs, the minimum investment is one gram and there is no maximum limit. There is no fixed tenure and is backed by physical gold. Returns are based on the prevailing market price of gold.
In Sovereign Gold Bond the minimum investment is one gram and the maximum is 4 kilogram annually. There is no physical gold backing and returns are based on the average gold prices of three days and interest income of 2.5%. In digital gold, the investment can be as low as Rs 1 and the maximum of Rs 2 lakh. There is no fixed tenure, there is backing of physical gold and returns are based on real time basis.
While Sovereign Gold Bonds are securities issued by the Reserve Bank of India on behalf of the government, it helps you build wealth and receive interest income. However, it comes with a lock-in of eight years, making it a relatively illiquid option when you need money.
Recently, NSE has restricted the sale of digital gold by stockbrokers, stating that it does not come under the definition of securities. Though there are many similarities to Gold ETFs, the primary difference is that digital gold is unregulated.
Build your gold allocation
So it goes without saying that all that glitters is not gold. Two of the most innovative ways of investing in gold this festive season are the Gold ETF and gold mutual fund or fund of funds which invest in gold. Use the correction to build your allocation. As gold prices have corrected from the highs touched in 2020, you can use the correction to build your allocation to gold.
The writer is senior fund manager, Alternative Investments, Quantum Mutual Fund
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