After 12% CAGR return in 5 years, should you invest in gold ETFs?

By S Ravi

Bullion is a bulk quantity of precious metals, primarily gold, which is measured by weight and usually cast as bars or stored in the form of ornaments and jewellery. India is the largest market for gold jewellery in the world.

A highly coveted asset throughout India, gold has significant emotional and social value attached to it. People buy gold not just for personal use or for gifting, but also as an investment.


Gold investment is worth it, as it is a safe hedge against inflation. In the long term, the returns on investment in gold are in line with the rate of inflation. Bullions in different weights can be purchased from financial institutions, bullion retailers or even jewellers for their price in gold weight. This purchase includes a dealer’s premium, and gold rates may be spot prices lower than the market.

Gold can even be bought online in India through an SIP (systematic investment plan) as it is considered a more affordable strategy. One can opt to pay a small amount on a monthly basis over a fixed period to accumulate its worth in gold and average the cost. Gold can be redeemed once the payment terms are complete.

Another alternative is gold ETFs or Exchange Traded Funds. These are commodity-based mutual funds that invests in assets like gold. These exchange-traded funds perform like individual stocks and are traded similarly on the stock exchange. They are available, both in dematerialised and in paper form. An investor invests in stocks instead of the actual metal, and once it is traded, they are credited with the unit’s equivalent in cash instead of the actual gold.

Gold has been shining bright in the past three months. Due to the rally in gold prices, gold funds and gold ETFs have been receiving large inflows in the recent past. Gold has no doubt been one of the best assets classes with an annualised return of 24 per cent which renders other financial assets pale in comparison. It has gained 50 per cent in the last one year to a historic high in the domestic market. Even over a slightly longer term, gold has delivered 11.7 per cent annualised CAGR return in the last 12 years, 9.8 per cent in 10 years, 12.3 per cent in the last 5 last years and 16.7 per cent in the last 3 years.

According to brokerages and mutual funds, retail investors have lately been keen on taking derivative positions and investing in stocks and ETFs. Investors have been opening trading accounts in large numbers during the lockdown. Many of these investors are high net worth individuals. Due to lockdown and issues in physical deliveries, many commodity investors have also shifted to gold ETFs. It is easier to take position and sell ETFs. This shows the changing sentiment of investors towards the yellow metal and the shift in investment patterns that the Covid-19 outbreak has brought in.

(The author is former BSE chairman and managing partner of Ravi Rajan & Co. Views are his own)