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How to ensure liquidity from the gold in your portfolio?

Jul 16, 2021
2 mins | Views 19629

Gold as a commodity has witnessed a remarkable growth in the last couple of years. With achieving an all-time high of INR 57,008 on 7th August 20201, it has given a bumper return of 54% from its level of INR 37,0162 on the same date a year ago.

As the economy and the market is moving into a cycle of positive growth, gold prices have stabilised from its all-time high to today hover around the INR 47,000-50,0003 mark, having maintained these levels since February 2021.

With gold at seemingly attractive levels from its position in the year gone by, maybe it is time to include gold in your portfolio? Especially as we are going through a resurgence of sorts of the pandemic, an investment such as gold can give you comfort and security.

The most conventional means for gold investment has been to purchase actual physical gold. But with the storage, security, authenticity and liquidation cost concerns, is this truly the best means of gold investment?

Enter Gold Exchange Traded Funds (Gold ETF)

  • What are they ?

    A Gold ETF is a commodity-based mutual fund that invests majority of its corpus into physical gold. Its objective is to mimic the actual returns and price performance of gold. Gold ETFs are akin to listed mutual funds or shares as they are listed and traded on the stock exchange.

    Just like all mutual funds, Gold ETFs are traded in units. The value of 1 unit of a Gold ETF is equal to the approximate price of 1 gm of gold.

  • How do they score over holding physical gold?

    1. Nil storage costs

      Gold ETF being listed on the stock exchange is held in dematerialised form. This makes their holding costs negligible vis-à-vis the higher storage costs such as locker rent and operation charges in case of physical gold.

    2. Liquidate at the click of a button!

      Monetising traditionally held gold requires you to fetch your gold from the locker, visit a jeweller, get its purity assessed and then liquidate it with the deduction of making cost.

      Monetising Gold ETFs on the other hand is simply done at the ‘click of a button’. All you need to do is sell the units from your demat just as you would sell any listed securities. You can even carry out partial liquidation with Gold ETF which can become cumbersome with physical gold investments.

      Let’s say you bought a 10-gm gold coin at INR 30,000 a couple of years back. Today you want to liquidate INR 10,000 worth for a medical emergency. For physical gold you would have to sell your entire investment. This would also mean losing out on making costs and tax costs on the entire amount. If you had invested in 10 units of Gold ETF instead, today you could have done a partial liquidation of 2-3 units to receive ~INR 10,000 for your immediate needs.

    3. No fear here!

      Physical gold comes with a security risk, especially if you store it at home. Gold ETFs nullify this security risk as they are held securely in your online demat accounts.

    4. No worries of authenticity here!

      How would you determine with certainty the purity and authenticity of physical gold that you are buying? Purity and value tends to differ from city to city and jeweller to jeweller. Gold ETFs on the other assure you of holding 99.5% purity gold as the underlying asset.

You can invest in Gold ETFs today to add the liquidity, flexibility and security of gold to your portfolio without the hassles of buying and holding actual physical gold.

There is truly a better way to ride the ‘gold wave’ today with Gold ETFs.

Source:

  1. https://www.business-standard.com/article/markets/gold-price-surges-to-all-time-high-of-rs-57-008-silver-continues-to-climb-120080701854_1.html

  2. https://www1.nseindia.com/products/content/derivatives/commodity/historical_spot_rate_com.htm

  3. Average price from February 2021 till 4th May 2021
    https://www1.nseindia.com/products/content/derivatives/commodity/historical_spot_rate_com.htm

Mutual Fund investments are subject to market risks, read all scheme related documents carefully.

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