When it comes to investing in exchange traded fund, mostly we think about investing in market index like NIFTY or Sensex. However, with more awareness happening on ETF investing, investors have started investing in various market cap indexes like large cap ETF, midcap or small cap ETF. Investors can also invest in various sectors like banking, pharma and healthcare and even international ETFs are now available to invest. Remember, to invest in ETF, you must have demat and share trading account.
One of the popular ETF investing that has emerged is Gold and of late investing in silver has also caught up. Before we talk more about this let us know what an ETF is.
What Is ETF?
ETF is a type of mutual fund which is transacted only on the stock exchanges, just like any other stocks. Unlike other regular mutual fund schemes, the price of ETFs keep changing just like stocks during the market trading hour. The NAV of ETF mutual fund is released along with other mutual funds at the end of the market hours daily. Mutual fund NAV can be found on the website of AMFI India.
What Is The Characteristics Of Gold And Silver As An Asset?
- Both, gold and silver are precious metals and used in jewellery and as bullion. Silver also has industrial use such as solar panels, electric vehicles, smartphones etc.).
- In India, gold as a metal has huge demand in households, especially during festivities and marriage time as it is considered auspicious.
- Both this metals have lower correlation with equities. Hence they can be used for asset allocation purposes to diversify investor portfolio and thus reduce the risk.
- However, historical results shows that gold is usually counter-cyclical to equities. Therefore, having gold in the portfolio can bring stability to investors’ portfolio during various investment cycles.
- Both these metals can also be used as hedge against inflation as they have the potential to give inflation beating returns in the long term.
Gold As A Hedge Against Inflation
The below chart shows how the gold beat inflation in most years if the investors have a long investment horizon.
Why Invest In Gold And Silver Etfs?
- As gold and silver have low correlation with equities they are important for asset allocation purposes. Asset allocation offers risk diversification.
- Both these metals are a good hedge against inflation.
- While gold always has huge domestic demand, the demand of silver is rising for new age technologies like solar panels, smartphones and electric vehicles over and above the use in jewellery.
- Cost of buying ETF is much lower than storing gold in bank locker plus incurring the jewellery making cost.
Who Can Invest In Gold And Silver Etfs?
- Investors who are interested to reduce their downside risks in stock market downturns.
- Investors who are looking for cost effective and a liquid alternative investment options compared to investment in physical gold and silver jewellery or bars/ bullions.
- Investors who are ready to take short term volatility for long term gains.
- Investors who have a long term investment horizon of minimum 5+ years.
Investing in exchange traded fund is a low cost investment option compared to regular mutual funds. To invest in ETF, one must have demat and share trading account. However, before investing in ETF the investors must consult a financial advisor.