For generations, Indian households have maintained a consistent relationship with gold and silver in their physical forms. Traditionally, the purchase of jewellery or coins during festive seasons was the primary method of wealth preservation. These metals have functioned as a reliable financial safety net for decades as they remain embedded in the cultural and economic fabric of the country.
However, as the economy becomes increasingly digital and the financial markets mature, a shift is taking place, and investors are preferring gold and silver in their electronic form. As a result, Gold and Silver Exchange Traded Funds (ETFs) are emerging as transparent, cost-effective, and liquid alternatives to holding the metals in their precious form. In a climate characterised by global inflationary pressures and currency fluctuations, these instruments are being viewed as strategic tools for portfolio diversification rather than just digital versions of ornaments.
Gold ETFs as a portfolio stabiliser
Gold ETFs are open-ended mutual fund schemes that track the price of physical gold in India. Each unit of the ETF is typically backed by 24-carat physical gold of 99.5% purity, which is stored in secure vaults that are managed by a custodian. When an investor buys a unit, they are essentially owning a portion of that physical gold without having to take delivery of it.
The primary role of a Gold ETF is to act as a portfolio stabiliser. Historically, gold has shared a low or negative correlation with equities. This means that when equity markets experience volatility or downturns due to economic cycles or geopolitical tensions, gold often maintains its value or appreciates. This inverse relationship provides a cushion, reducing the overall risk of an investment portfolio.
Practically, Gold ETFs can offer several advantages over physical gold. They remove the necessity for bank lockers or home safes, thereby eliminating storage costs and insurance concerns. Furthermore, they bypass the making charges and wastage fees associated with jewellery, which can range from 10 per cent to 20 per cent of the value. With ETFs, investors can buy and sell at the prevailing market price on the stock exchange, ensuring that the value remains consistent with the global spot prices.
Silver ETFs for exposure to industrial demand
While gold is viewed primarily as a financial asset and a store of value, silver possesses unique dual characteristics that distinguish it from its yellow counterpart. Silver ETFs provide exposure to a metal that is both a precious asset and a significant industrial commodity. This dual nature introduces a different set of growth drivers for an investor’s portfolio.
Silver is an essential component in the global transition toward sustainable energy and advanced technology. It has the highest electrical and thermal conductivity of all metals, making it necessary for the production of photovoltaic cells in solar panels. Additionally, it is used extensively in the circuitry of Electric Vehicles (EVs), 5G telecommunications infrastructure and a wide array of consumer electronics.
Investing in Silver ETFs allows you as an investor to participate in the growth of these industrial sectors. Unlike physical silver, which is bulky to store and prone to oxidation, a process where the metal tarnishes and turns black over time, ETFs offer a way to hold the asset in a digital format. This eliminates the concerns regarding the purity of the metal and the difficulty of selling large quantities of physical silver in the open market.
Some key considerations for investors
Transitioning from physical assets to digital units requires an understanding of the technical nuances of the stock market. Investors should evaluate four specific factors before allocating capital:
- Tracking Error: This measures the variance between the ETF’s returns and the actual price movement of the underlying physical metal. While the fund aims to mirror the metal’s price, factors like cash holdings for redemptions or transaction costs can cause a slight deviation. A lower tracking error generally suggests more efficient fund management.
- Expense Ratio: This is the annual fee charged by the asset management company (AMC) to cover administrative and management costs. Since these are intended to be long-term instruments, a higher expense ratio can influence the total compounded returns over several years.
- Liquidity on the Exchange: Unlike physical gold, which can be sold to a local jeweler, an ETF must be sold on the stock exchange. It is important to check the trading volume of the specific ETF to ensure that you can enter or exit your position quickly without significantly impacting the price.
- Taxation and Regulatory Framework: Metal-backed ETFs are subject to Capital Gains Tax. Following recent regulatory updates in India, the taxation on these instruments is typically aligned with the investor’s applicable income tax slab, regardless of the holding period. It is advisable to consult a tax professional to understand how these gains will impact your net-of-tax returns.
How to start investing in metal ETFs
To begin investing in Gold or Silver ETFs, an investor must have a Demat account and a trading account, similar to what is required for buying shares. These units are traded on the National Stock Exchange (NSE) and the Bombay Stock Exchange (BSE) during standard market hours.
For those who do not wish to open a Demat account, many fund houses offer Gold Savings Funds or Silver Fund of Funds (FoF). These are mutual funds that invest in ETFs. This route allows investors to use Systematic Investment Plans (SIPs), enabling them to invest small amounts, as low as ₹500, at regular intervals, which helps in averaging the purchase cost over time.
Note to the Reader: This article has been produced on behalf of the brand by HT Brand Studio and does not have journalistic/editorial involvement of Mint.