Gold and Silver ETF FOFs

Gold and Silver ETF Fund of Funds is a fund of funds (FOFs) mutual fund scheme, which invests in Gold and Silver Exchange Traded Funds. Exchange traded funds (ETFs) are mutual funds schemes which track a benchmark market index or prices of commodities e.g. gold, silver.

ETFs are listed on stock exchanges and are traded like stocks. You can buy or sell ETFs only on stock exchanges, unless you are transacting in lot sizes (as specified by the Asset Management Company). A Fund of Fund (FOF), on the other hand, is like any other open ended mutual fund scheme. You can invest in FOF directly with the Asset Management Company (AMC) or through your mutual fund distributor. Similarly, you can redeem your FOF units directly with the AMC. Gold and Silver ETF FOF is a relatively new product in India; it offers a number of potential benefit to investors. In this article, we will discuss about ETFs and FOFs of both schemes.

Why you should invest in Gold and Silver as an asset class?

• India is one of the biggestmarkets forSilver and gold in the world. Indian familiestraditionally buy Gold and Silver on auspicious occasions like Deepawali, Akshay Tritiya, Dhanteras, New Year, Ugadi and during weddings and other social occasions, etc. With rising affluence demand of goldand silver is increasing in India.
• Gold and Silver is also seen as a store of economic value over the long term horizon. Over a long period of time these two commodities are supposed to retain its purchasing power and is therefore, seen as a hedge against inflation.
• Gold and Silver are also important asset classes for asset allocation purposes. The primary purpose of asset allocation is to balance risk and return. Historical data shows that gold is usuallycounter-cyclical to equities i.e. gold outperforms when equity underperforms and vice versa. Adding gold to your investment portfolio will bring more stability.
• In a market like India, gold can also be a hedge against currency risks i.e. when the INR depreciates, gold tends to appreciate in price.
• Apart from its use in jewellery, silver is also used for industrial purposes. New age industries like, solar panels, smart phones and electric vehicles, etc. use Silver for their production purposes.Therefore, the industrial demand for silver is also rising but supply is constrained. You should, therefore, consider investing in silver as an asset class since it has the potential of generating capital appreciation for you over long investment horizons.
• Like gold, silver also has low correlation with equity returns and therefore is very useful asset class for asset allocation purposes. While gold is counter-cyclical to equities and tends to outperform in bear markets, it tends to underperform in bull markets when investors are ready to take more risks. However, silver tends to outperform gold in bull markets because silver demand for industrial use grows in bull markets (periods of higher economic growth).

What are Gold and Silver ETFs?

Exchange traded funds (ETFs) are passive schemes, which aim to track a particular market index like Sensex, Nifty, BSE – 100, Nifty – 100 etc or prices of commodities like Gold, Silver etc. Gold Exchange Traded Funds or Gold ETF or Gold exchange traded fund track the price of pure Gold. Gold ETFs are backed by physical Gold. One Gold ETF unit is equal to 1 gram of gold and is backed by 99.5% pure physical gold bars (source: AMFI, Knowledge Centre, Gold ETFs).

Silver exchange traded fund or Silver ETFs are financial instruments which track the price of pure silver. These instruments invest in physical silver or silver related instruments. Physical Silver of 30 kg bars with fineness of 999 parts per thousand (or 99.9% purity) conforming to London Bullion Market Association (LBMA) Good Delivery Standards are only permitted by SEBI for silver ETFs (source: SEBI circular on Norms for Silver Exchange Traded Funds (Silver ETFs) and Gold Exchange Traded Funds (Gold ETFs) dated November 24, 2021).

You need to have Demat and trading accounts to invest in exchange traded funds.

Why invest in Gold and Silver ETF FOFs?

• Spreading your investments over multiple asset classes (i.e. asset allocation) will diversify / reduce your portfolio risks. Both gold and silver can be used for your asset allocation. Gold and silver have low correlation with equities. Gold is usually counter-cyclical to equities. It can bring stability to your portfolio in different investment cycles. Silver usually outperforms gold in bull-markets. Hence it can add further diversification to your investment portfolio.
• You can get exposure to both gold and silver as asset classes by investing in a single product, Gold and Silver ETF FOFs. Fund of Funds structure offers you moreconvenience, affordability, and liquidity ascompared to physical Gold and Silver.
• You do not need to open Demat and trading account to invest in Gold and Silver ETF FOFs. You can invest in these ETFs like any other open ended mutual fund scheme. You can also redeem your Gold and Silver ETF FOF units at any time with the AMC subject to the exit load structure of the scheme (refer to scheme information document).
• You can take exposure in gold and silver with a much smaller amount by investing in Gold and Silver ETF FOFs.Minimum one time investment amounts in most mutual fund schemes is just Rs 5,000. Purchasing physical gold and silver requiressignificantly higher outlay.
• You can also invest in Gold and Silver ETF FOFsfrom your regular savings through Systematic Investment Plans (SIPs).

Who should invest in Gold and Silver ETF FOFs?

• Investors looking for multi asset allocation benefits by investing in multiple asset classes.
• Investors looking to reduce their downside risks in market downturns.
• Investors looking for cost efficient and liquid alternative investment options to physical gold and silver
• You should be prepared for short term volatility
• You should have sufficiently long investment horizons

Investors should consult with their financial advisors if Gold and Silver ETF FOFs is suitable for their investment needs.

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Mutual Fund investments are subject to market risks, read all scheme related documents carefully.