Gold ETFs as an Investment in 2022: A Comprehensive Analysis

The concept of investing in any fund is to save for the future with a disciplined long-term strategy. It’s not like investing in the stock market just to make a fast buck and then exit. Investing in gold ETFs or any other fund with a mere one-year horizon is considered a poor investment strategy, especially for long-term investors.

Understanding Gold as an Alternative Asset Class

Gold is primarily viewed as an alternative asset class for institutional investors, such as Foreign Institutional Investors (FII) and Domestic Institutional Investors (DII). These investors often use gold as a hedging instrument to recover their losses in the equity segment. Whenever there is an increased risk in the equity market, FII and DII shift their money from the equity segment to the gold asset class. In such circumstances, gold can deliver massive returns, just like it did during the 2020 pandemic, when the equity market faced a significant crash.

The Best Way to Invest in Gold: Sovereign Gold Bonds (SGBs)

While gold ETFs can be a part of a portfolio, Sovereign Gold Bonds (SGBs) are often considered a better option in the long term. SGBs are issued by the Reserve Bank of India (RBI) on behalf of the Government of India, making them a reliable and low-risk investment. Unlike gold funds or digital gold, which can be subject to market volatility and additional fees, SGBs have no associated risk. The price of SGBs is always linked to the price of real gold, regardless of the investment period. Additionally, there is no tax on the capital gains derived from SGBs, while you can also earn an extra 2.5% interest on your investment, which is taxable.

Long-Term Pros and Cons of Gold ETFs

While gold ETFs have provided excellent returns in 2021, it is unlikely to see the same level of returns in 2022. However, you can still invest in gold mutual funds, and your investment in gold is likely to appreciate. Gold ETFs offer flexibility and liquidity, allowing investors to buy and sell gold at any time. Nevertheless, it is essential to be aware of the potential fees and expenses associated with ETFs, such as management fees, trading costs, and tracking errors. These factors can impact your overall returns over time.

Potential for Including Gold ETFs in a Diversified Portfolio

Despite their limitations, gold ETFs can be a part of a diversified investment portfolio. They can serve as a hedge against market volatility and help mitigate the risks associated with fluctuating equity markets. Gilt funds, which invest in government bonds, are often considered a better option for hedging against market volatility. Gilt funds offer stable returns and lower risk, making them attractive for investors seeking a more conservative approach.

Conclusion and Final Thoughts

I have tried including gold ETFs in my portfolio as a hedge against market volatility, but I found that gilt funds are a better option for this purpose. While gold ETFs offer a certain level of flexibility and liquidity, they may not provide the same long-term stability and predictability as gilt funds. If you are looking for a safer and more stable investment, Sovereign Gold Bonds (SGBs) might be a better choice, given their low-risk nature and tax advantages.