Gold ETFs: Take the SIP route for higher returns
As gold is an effective portfolio diversifier, systematic investment plans (SIPs) in gold exchange traded funds (ETFs) can help investors earn higher returns. The metal has historically been viewed as a safe-haven asset and investors often seek it during periods of uncertainty.
In fact, the geopolitical issues around the world are prompting investors to turn to gold as a hedge against potential market volatility. Rising inflation is also making the yellow metal more attractive as an investment. When inflation is high, the price of gold tends to rise as well, which can help investors preserve the purchasing power of their capital. Moreover, fluctuations in currency values, particularly a weaker dollar, enhance gold’s attractiveness because it is priced in dollars.
Gold ETF AUM surges
In June, investors invested Rs 726 crore into gold ETFs after pouring
in Rs 827 crore in May. In the first six months of 2024, the category
received a total inflow of `3,185 crore. And in FY25 so far, the category
witnessed an inflow of `1,157.91 crore.
Barring the month of March, net inflows in gold ETFs have been positive for 15
months in a row till June this year. Moreover, as the prices of the yellow
metal surged, the assets under management of gold ETFs rose 54% since June last
year, touching close to `34,500 crore.
To maximise returns from gold ETFs over the long term, it is wise to adopt a systematic and disciplined approach. “Regular investments, similar to a systematic investment plan (SIP), help average out costs and mitigate the effects of market volatility,” says Anirudh Garg, partner, Invasset.
For investors seeking long-term returns through gold ETFs, the rupee-cost averaging can be beneficial. This strategy involves investing a fixed amount of money in gold ETFs at regular intervals, regardless of the current gold price. “Over time, this approach helps average out the cost per unit of gold acquired, mitigating the impact of market fluctuations,” says Sonam Srivastava, founder, Wright Research.
The enduring global inflation, which remains above central banks’ comfort levels, and the persistent uncertainty surrounding interest rate cuts have bolstered gold’s appeal as a safe haven and as a hedge against inflation, thereby attracting more investors. Melvyn Santarita, analyst, Manager Research, Morningstar Investment Research India, says over the years gold has gained prominence as an effective diversifier, prompting many to include gold ETFs in their portfolios. “Gold prices also saw some slight correction in June which spurred buying from investors,” he points out.
Portfolio diversification
It’s generally recommended to allocate about 10% of your portfolio to gold for diversification. Staying informed about macroeconomic indicators, such as inflation rates and global economic trends, and keeping an eye on geopolitical developments can also help make more informed investment decisions. While gold offers advantages as a long-term investment, its short-term performance may not outperform stocks. “Carefully consider your risk tolerance and investment goals before making any investment decisions,” says Srivastava.
Gold’s outlook
In the near term, gold’s outlook is shaped by several factors. Economic data releases, especially from major economies like the US, will significantly influence gold prices. Weak economic data typically drives investors towards safe-haven assets like gold. Central bank actions, particularly decisions on interest rates by the US Federal Reserve are crucial. So, any signs of pausing rate hikes can make gold more attractive.
Persistent inflation concerns continue to support gold demand. Any escalation in geopolitical tensions could boost gold prices as investors seek safety. The current geopolitical climate and inflationary pressures are factors that continue to support gold prices. Investors seeking a hedge against these uncertainties may find gold ETFs to be a valuable addition to their portfolios.
Source: https://www.financialexpress.com/