In July 2022, the news was dominated by discussions on Gold Exchange Traded Funds (ETFs), which experienced a significant net outflow of Rs 457 crore. This followed an inflow of Rs 135 crore in June 2022. The outflow occurred because investors chose to allocate their resources to other asset classes as part of re-evaluating their portfolio strategies.
About Gold ETFs
Gold ETFs are financial instruments that passively track the domestic physical gold price. They’re investment tools based on gold prices and invested in gold bullion. Each unit of a Gold ETF is equivalent to 1 gram of physical gold known for its high purity. These units may exist in paper or dematerialised form. Gold ETFs provide a unique combination of stock investment flexibility and gold investment simplicity.
The Benefits of Gold ETFs
Gold ETFs offer a complete transparency concerning the holdings, with significantly lower expenses compared to physical gold investments. No taxes such as wealth tax, security transaction tax, VAT or sales tax apply to Gold ETFs. Additionally, these investments are secure, free from theft concerns as they are held in the Demat Account of the owner.
Reasons for the Gold ETFs Outflow
The shift in investment from Gold ETFs to other assets can be attributed to several factors. Key among them is the anticipation of a rising interest rate cycle which could depress gold prices. Investors’ fear of falling gold prices directly influenced the net flows into the Gold ETFs. Another contributing factor is the falling rupee, further impacting the demand and supply dynamics of gold. This trend isn’t confined to India, but has been observed globally too, with Gold ETF’s recording substantial outflows due to lower gold prices.
Exchange Traded Fund Basics
Exchange-Traded Fund (ETF) is a form of security that trades on an exchange similar to a stock. It reflects the composition of an Index, like BSE Sensex, with its trading value rooted in the Net Asset Value (NAV) of the underlying stocks it represents. ETFs differentiate from mutual funds since they fluctuate throughout the day as they are bought and sold, whereas mutual funds only trade after the market closes each day. An ETF can span hundreds or thousands of stocks across different industries, or focus on one specific industry or sector.
The Role of Bond ETFs
Bond ETFs include government bonds, corporate bonds, and state and local bonds—known as municipal bonds. These are loan representations made by investors to borrowers, typically from corporations or governments. ETFs aren’t just cost-effective but also offer diversified investment portfolios to investors.
UPSC Civil Services Examination Questions Review
The article mentions two specific previous year questions from the UPSC Civil Services Examination to provide more insights for would-be exam takers. The first question involves understanding how Indian Government Bond Yields are influenced by factors such as the actions of the United States Federal Reserve, actions of the Reserve Bank of India, inflation, and short-term interest rates. The second question delves into the intricacies of ‘IFC Masala Bonds’, testing knowledge on International Finance Corporation’s role, and the use of these rupee-denominated bonds as a source of debt financing for the public and private sectors.
These questions and their explanations serve to further explore the dynamics of financial instruments at play in the market and global economy, demonstrating the potential complexities and impacts investors need to be aware of when considering their portfolio strategies.
