A ‘digital’ dhanteras : The growing popularity of gold mutual funds, gold ETFs and silver ETFs this festive season

The festive season in India, traditionally commencing with Dhanteras, has long been synonymous with the purchase of gold and silver in physical form. For centuries, these precious metals have been revered by Indian families not just as ornaments, but for the value and security that they offer, as they get passed down through generations.

Over the last few years, the traditional rush for physical gold during the festive season has been mirrored by a massive surge in paper gold investment. This September witnessed the highest-ever inflows into gold Exchange Traded Funds (ETFs) with a four-fold rise, crossing the ₹8,300 mark. This shift signals a change in the way the average retail investor is thinking, prioritising convenience, liquidity and strategic asset allocation over the physical possession of the metal.

Why is paper gold becoming popular?

The growing popularity of Gold ETFs and Gold Mutual Funds (MFs), along with the relatively newer Silver ETFs, is not just a festive fad. These instruments are increasingly viewed as a crucial hedge against market volatility and geopolitical risks. When economic uncertainties rise at the global level, driven by events such as geopolitical conflicts, inflationary pressures or sharp corrections in equity markets, investors traditionally start to buy gold, recognising its historical role as a safe-haven.

Gold ETFs and MFs offer instant exposure to this asset. Furthermore, it has been seen that the inflows recorded in the digital gold space often coincide with periods of high macroeconomic uncertainty, proving that investors are using these instruments as a sophisticated tool to balance their portfolios. Unlike purchasing stocks or bonds, investing in paper gold provides a predictable counter-cyclical element, ensuring portfolio stability when riskier assets decline. This reliability makes paper gold a powerful component of any diversified portfolio, especially in the current dynamic global environment.

Some advantages of digital ownership

One of the main reasons for the overwhelming shift from physical to digital gold and silver is the practical advantage that ETFs and Mutual Funds offer, as against taking physical delivery of these metals. First, they completely eliminate the traditional hassle and cost associated with storage and security. Investors don’t need to bear the expense of bank lockers or the risk of holding physical bullion at home. Second, digital assets come with a guarantee of purity, which is a frequent concern with physical jewellery or even some small bars. Gold ETFs, for instance, are backed by physical gold of minimum 99.5 per cent purity.

Thirdly, the liquidity and ease of buying and selling is unmatched. Digital gold can be purchased or redeemed instantly through a trading app or broker, unlike physical metal, which requires a trip to a jeweller, often involving potential deductions for making charges or purity checks. Finally, instruments like Gold MFs allow investors to utilise Systematic Investment Plans (SIPs), enabling disciplined and small-ticket investments, a feature impossible to replicate when you are buying the metal in the physical form.

The key differences between Gold ETFs and Gold MF

There are two main ways to own gold digitally – a Gold ETF and or Gold MF (specifically a Gold Fund of Fund). The core between the two is in the mechanism of transaction and ownership. A Gold ETF is a unit that represents physical gold and is traded on the stock exchange, much like a stock. Therefore, buying or selling an ETF requires a mandatory Demat account and a brokerage account. The price of an ETF fluctuates throughout the trading day, and the purchase must be made at the prevailing market price. This structure is often preferred by active traders or lump-sum investors who prioritise real-time pricing and intraday liquidity.

Conversely, a Gold MF (typically a Fund of Fund) does not directly own gold but instead invests its corpus in Gold ETFs. The key advantage here is that it does not require a Demat account, making it accessible to a broader range of investors, especially those familiar with the mutual fund route. Gold MFs are purchased at the end-of-day Net Asset Value (NAV) and are highly suitable for SIP investors who prefer automated, fixed monthly investments without the need to actively track the stock exchange. While Gold MFs generally have a slightly higher expense ratio compared to the underlying Gold ETF, their ease of use and SIP functionality make them a compelling entry point for many retail investors.

Gaining the industrial advantage with Silver ETFs

For those looking to add an additional layer of diversification to the precious metals space, Silver ETFs are a good option. This is a relatively newer asset class in the Indian market, yet it is gaining rapid traction as investors seek exposure beyond gold. Silver offers a unique investment proposition due to its dual role – it functions both as a traditional safe-haven asset class and as a critical industrial metal which is taking up its demand at a global level. In fact, a significant portion of silver’s demand comes from industrial applications, particularly in advanced manufacturing sectors. Silver is used in emerging technologies such as solar photovoltaic cells, electronics, electric vehicle components and medical devices.

This industrial demand means that silver’s price movements are not solely dependent on inflation and geopolitical fear. They are also influenced by global industrial production and technological innovation. This unique characteristic allows Silver ETFs to offer genuine portfolio diversification, as their price drivers are partially uncorrelated with those of pure gold. Therefore, investors who are bullish on the long-term growth of clean energy and electronics often allocate a portion of their portfolio to Silver ETFs to capture both the safe-haven benefit and the potential upside from industrial expansion.

Note to the Reader: This article has been produced on behalf of the brand by HT Brand Studio and does not have journalistic/editorial involvement of Mint.