Gold ETFs: With one-year average returns of almost 30%, gold ETFs draw investor interest ahead of Dhanteras 2024; should you invest?

ICRA Analytics stated that Gold ETFs are becoming more popular with investors because of their liquidity, transparency, and alignment with global prices. The increasing interest is clear as fund inflows surged by an impressive 2695 percent from Rs 44.11 crore in September 2019 to Rs 1232.99 crore in September 2024.

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Investors are favoring Gold ETFs over physical gold due to the increasing geopolitical tensions, which are enhancing the appeal of gold as a “safe-haven” asset. This preference is driven by the convenience of not having to store the gold and the absence of concerns regarding purity and theft associated with physical gold investments.
“Investors favour investing in Gold ETFs due to liquidity, transparency, cost-effectiveness, and ease of trading compared to physical gold. The heightened activity in these funds is also driven by the prospects of an interest rate cut by the U.S. Federal Reserve in the coming months,” Ashwini Kumar, Senior Vice President and Head Market Data, ICRA Analytics, said.

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There are as many as 17 Gold ETF schemes in the market, and the average one-year returns were in the range of 29.12 percent, while 3-year and 5-year returns were 16.93 percent and 13.59 percent, respectively. LIC MF Gold ETF gave the maximum returns on a 1-year, 3-year, and 5-year basis at 29.97 percent, 17.47 percent, and 13.87 percent, respectively. This is marginally lower in contrast to an average return of 30.13 percent, 18.03 percent, and 14.88 percent over a 1-year, 3-year, and 5-year period on physical gold.

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India is expected to be the world’s second-largest consumer of gold, following China. Anticipations of increased gold demand during the festive season arose after the government reduced import duties in July 2024. Nevertheless, concerns have emerged that elevated gold prices could dampen investor confidence by limiting the purchasing power of many buyers. Additionally, purchasing physical gold involves certain risks, such as storage, theft, and impurities, which can impact the overall returns. In comparison, gold ETFs are considered safer as they are subject to strict regulations and are traded on exchanges in real-time, stated the ICRA Analytics report.

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“Investors with a short to medium term investment horizon may consider investment through Gold ETFs. A buy on dips strategy in this case may help investors to capitalise on temporary correction in prices. Also, given the current market dynamics where equities are showing mixed trends, a modest allocation to gold may serve as a hedge against inflation and market volatility which may help balance risks in an optimum manner,” Kumar added.

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