It has been a prevalent tradition among Indians to invest in gold for financial security and for emotional reasons. Important events in Indian homes are marked with the purchase of the precious metal. They are grouped together to counteract deficiencies that could arise in an uncertain future.
The ancient tradition of accumulating gold for the future is a great way to diversify an individual's investment portfolio. The yellow metal is a hedge against inflation and a safe haven amid economic uncertainty.
This year, due to the sudden outbreak of COVID-19, gold prices in India and abroad rose more than 20%. In the face of any positive news about the vaccine trials, more and more investors stopped their money in the metal and ditched risky assets, causing gold prices to hit new records.
However, in 2020, Indians chose metal as an investment, beyond ceremonial or marriage purchases.
Between July and September this year, the demand for gold jewelry declined 48% year-on-year, to 52.8 tonnes, from around 101.6 tonnes a year earlier, according to the World Gold Council. However, demand of the yellow metal as an investment rose 52% to 33.8 tonnes, year-over-year, which is a clear indication that Indians have preferred gold ETFs over jewelry.
Also during the same period, that is, in August, the mineral reached its highest level in its life with 56,191 rupees per 10 grams. By comparison, prices were around Rs 38,000 for 10g in November 2019.
According to data from the Mutual Fund Association of India (AMFI), the number of securities in gold ETFs increased from 3.77 lakh in October 2019 to 7.82 lakh in October 2020.
This is because investing has been simplified for Indian investors, thanks to the improved adoption of digital investment and money transfer patterns. One can start investing in gold for one rupee armed with a smartphone, internet connection, and a bank account with access to online banking services.
Internationally, gold exchange-traded funds (ETFs), exchange-traded funds (ETCs), and similar funds account for almost one-third of the demand for investment gold.
Gold-backed ETFs are regulated financial products.
As the name suggests, they are listed on exchanges and can be purchased from your trading account which is used to buy stocks. They are sold as units (as shares) where each unit represents a specific quantity of gold and the unit price reflects the price of the unit quantity. Unlike gold derivatives, most of these ETFs are fully backed by physical gold.
Investors can track price changes on an exchange and buy or sell instantly with a trading account.
The three most important benefits of gold ETFs are:
They are bonds issued by the Indian government that allow subscribers to buy gold in the form of dimes.
These bonds also bear interest at 2.5% and can be purchased when the Reserve Bank of India (RBI) opens the issue for subscription or on the open market.
It can be purchased online at commercial banks or physically at specific post offices. Bonds already listed can be bought on exchanges.
A resident Indian can purchase a minimum of 1 gram and a maximum of 500 grams per fiscal year by participating in the program.
Popular payment apps like Google Pay, Paytm, PhonePe, and MobiKwik allow users to purchase 24k gold with 99.9% purity in quantities as small as 1 gram at current market prices. Some apps give you the option of bringing metal into the house.
These applications are associated with the alloy refining company MMTC-PAMP India to allow users to buy and sell the metal in these applications.
In Google Pay, users can buy gold for just 1 rupee at the latest exchange rate and MMTC-PAMP will store the amount on their behalf.
These are variable capital funds that invest in gold ETFs. The plus point is that it allows you to see fluctuations in the price of gold and professional for-profit fund managers.
There are expert fund managers who keep a close eye on the fluctuations in the gold ETF market and decide to intervene to maximize returns for their investors.
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