All that glitters now is actually gold
Many Indians believe that we are, as a nation, among the best investors in gold worldwide. But quite often, the difference between physical consumption and investment is lost. Interestingly, studies across the Indian sub-continent have found that there is a clear emotional connect between the yellow metal and its consumers. A gold loan financing company's CEO, I professionally interacted with, told me that irrespective of gold price swings, his company's delinquency ratio always remained minimal.
Other than commodity traders who deal in the precious metal and are not averse to selling it when found profitable to, the rest, by and large tend to hoard and pass gold down their generations. This has been the historic trend in India.
What has changed though is the growing number of younger investors who prefer to use gold as a pure investment avenue and accumulate it with the clear-cut intention of profiting from it at the appropriate time. Smart investors have historically used Gold as a natural hedge in their portfolios to their equity holdings as in periods of crisis, when equities tend to weaken, gold has surged.
This was clearly witnessed in the early months of this decade, when the first Covid wave swept across the globe. This trend has remained with Gold emerging since then as one of the outperforming Asset classes. While Covid was the catalyst, the periodic flare-ups in geo-political hotspots have ensured that the price of Gold has been north bound. Besides the purchase of physical gold, the more popular avenues used by those that invest in gold are Exchange traded Funds (ETFs) and Fund of Funds.
Gold ETFs are units representing physical gold in dematerialized form. One Gold ETF unit is equal to 1 gram of 24k gold and is backed by physical gold of very high purity. Gold ETFs combine the flexibility of stock investment and the simplicity of gold investments and are listed at the premier stock exchanges, and traded just like the stock of any company. A demat account is necessary to transact in Gold ETFs and the new 12.5% rate post two years of holding taxation rules are applicable on the realized gains therefrom.
Gold Fund of Funds, more commonly referred to as Gold Mutual Funds are open-ended funds which invest in units of Gold ETF. The returns of these funds reflect that of the underlying Gold ETF. While these funds are very convenient for making pre-set (e.g. SIP) purchases and sales in gold, the expense ratios levied by the fund houses running them, make them marginally costlier. Its taxation is the same as ETFs. Yet, besides the convenience of auto-pilot investing that it offers, it also ensures disciplined investing making it a popular choice.
A look at gold returns over the last five years suggests it has been not just a hedge option but also an out-performer. But, notwithstanding fears of a price correction, there is still smart money accumulating it, betting on the stupidity of mankind and its inability to live in peace.
(Ashok Kumar heads LKW India. The views expressed here are his own)
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