Gold Exchange Traded Funds UPSC

Gold Exchange Traded Funds

As part of their portfolio rebalancing strategy, investors pulled money out of gold Exchange Traded Funds (ETFs) in July 2022, resulting in a net outflow of Rs 457 crore.

Image Source - Finology

Comparatively, in June 2022 there had been a net inflow of Rs 135 crore.

About Gold Exchange Traded Funds

Gold ETFs are passive investment products that are based on gold prices and invest in gold bullion with the goal of tracking the domestic physical gold price.
Gold ETFs are securities that track actual gold, which may be in the form of paper or in a dematerialized form.
One gram of actual, ultra-high purity gold serves as the backing for each unit of the gold ETF.
They mix the simplicity of gold investments with the flexibility of stock investing.

Advantages:

The holdings of an ETF are completely transparent.
Compared to investments in real gold, gold ETFs have significantly lower costs.
ETFs are not subject to a wealth tax, a securities transaction tax, a VAT, or a sales tax.
Since ETFs are safe and secure as units stored in the holder's Demat Account, there is no need to worry about theft.

Reasons for the Outflow

Investors anticipate that a rising interest rate cycle will cause gold prices to decline.
The net inflows into gold ETFs were impacted by the decline in the price of gold.
Another element that has probably affected the dynamics of gold demand and supply is the depreciating rupee.
It has also been noticed internationally, with gold ETFs reporting sizeable outflows as a result of falling gold prices.

Exchange Traded Fund

An exchange-traded fund (ETF) is a collection of securities that trade like stocks on an exchange.
ETFs represent an Index's constituent parts, such as the BSE Sensex. The Net Asset Value (NAV) of the underlying stocks (such as shares) that it represents determines its trading value.
ETF share prices change during the day due to buying and selling. Unlike mutual funds, which only trade once a day after the market closes, this is different.
An ETF may own hundreds or thousands of equities across a range of industries, or it may be confined to a single sector or business.
Government bonds, corporate bonds, state and local bonds, and other types of bonds—referred to as municipal bonds—can all be included in bond ETFs.

(A bond is a financial product that symbolizes a loan from an investor to a borrower (typically corporate or governmental).

ETFs, provide investors with a diversified investment portfolio in addition to being cost-effective.

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Source: The Business Standard

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