Dhanteras 2021: Gold ETF for investment purposes this Diwali season – Expert explains

In India, buying gold on auspicious occasions like Dhanteras and Diwali is a part of the tradition. Besides jewelry, when it comes to making investments in gold, traditionally, gold coins or gold bars have been the default option for most of the investors. However, Nitin Kabadi, Head - ETF Business, ICICI Prudential AMC, says, “There is a cost-efficient and convenient way to purchase gold for investment purposes i.e. in the form of gold ETFs.”

“Apart from the sentimental value the yellow metal has among the masses, gold has been a strong hedge against inflation. So, an allocation to gold not only adds up diversification to your portfolio but also aids in creating long-term value. So, this Dhanteras and Diwali when you are considering purchasing gold, you need not step out of the house. Instead, invest in a Gold ETF, which is just a matter of a couple of clicks for a KYC compliant person,” suggests Nitin Kabadi.

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Further, Kabadi adds, “For the uninitiated, a Gold ETF is an exchange-traded fund (ETF) that aims to track the domestic physical gold price. Purchasing Gold ETFs mean you are purchasing gold in an electronic form. Gold ETFs can be bought or sold on the exchanges directly using demat accounts. As a result, it is one of the easiest ways to buy and sell gold as it offers investors a cost effective and modern way of investment in a traditional avenue like gold.”

Kabadi cites few reasons why one should buy gold ETFs during Dhanteras and Diwali season:-

“a) Backing of Physical Gold

While when one buys Gold ETFs, the investor has the backing of actual physical gold of 99.5% purity. Generally, one unit of Gold ETF is equivalent to 1/100 of 1gram gold. The value of a gold ETF is linked to price of physical gold which means if the gold price rallies by 10%, the value of Gold ETF too appreciates by 10%.”

“b) Low Cost and very Convenient

When purchasing physical gold, a buyer incurs making charges and the gold rate is often at a market premium, both of which cannot be recovered at the time of selling. However, Gold ETF units are bought and sold at wholesale rate which is better than physical gold. Also underlying physical gold is stored in vaults which is insured against theft, burglary, spurious quality etc. So, one need not worry about the safety aspect of Gold ETF.”

“c) Low ticket size

Investors can do low ticket size purchases in gold ETFs starting with as low as Rs 50. This way, investors can accumulate gold units over the due course of time. Such ease of buying is not possible when dealing with physical gold as it has a relatively higher purchase price attached. With gold ETFs, one can easily accumulate units over time with a lower denomination of investment.”

“d) Ease in Transaction

Flexibility is a strong feature of Gold ETFs. Since they are purchased online and held in a demat account, you can enter or exit whenever you want.”

“e) Tax Efficient Investment

When purchasing and selling physical gold, a buyer attracts 3% GST each time. On the other hand, Gold ETFs trade net of GST and hence becomes a much more efficient way to invest in gold. In terms of taxation, Gold ETFs are subject to long-term capital gain tax with indexation benefits. The long-term capital gain for Gold ETFs is on gains made on units that are sold after 36 months of holding. Such a tax structure on Gold ETFs makes them an investment-friendly alternative for gold investment.”

“Apart from the festivities, at a time when inflation is rearing across global economies and in India, it will be a prudent decision to increase allocation to gold through Gold ETFs in order to protect your investment portfolio from undue volatility. Ideally, one can consider up to 10% allocation to gold in a portfolio,” Kabadi concluded.

(Disclaimer: The views/suggestions/advice expressed here in this article are solely by investment experts. Zee Business suggests its readers to consult with their investment advisers before making any financial decision.)