Should You Invest in Gold ETF FoFs During Market Volatility? A Smart Allocation Guide

A gold ETF FoF is a type of mutual fund scheme that invests in gold ETFs (exchange-traded funds). These funds offer you an easy way to gain exposure to gold through the mutual fund route, without physically holding the metal.
 

Here’s how a gold ETF fund of funds works:

• The gold ETF FoF pools money from investors to buy gold ETF units

• These gold ETFs hold physical gold of 99.5% purity to track the price of gold

• The domestic price of gold impacts gold ETF returns and the fund’s performance
   

But do note that just like any other MF scheme, gold ETF mutual funds also charge an expense ratio that covers the fund’s administrative and management expenses. But the good part is that you can invest in gold ETF FoFs through your mutual fund investment account (without opening a separate Demat account).

(Please note that investors are bearing the recurring expenses of Gold ETF Fund of Fund in addition to the expenses of Gold Exchange Traded Fund.)

• Gold as a relatively defensive Asset

  Historically, gold has been seen as a relatively defensive asset. This simply means that during uncertain or volatile market conditions, investors tend to move towards gold as a way to manage risk.
   

• Low Correlation with Other Assets

  Gold usually behaves differently from assets like equities and debt.

  • When equities rise, gold may move slowly or even decline

  • When equities fall, gold may move slowly or even rise

    This difference in movement is what makes gold useful during volatile periods.
     

• Helps with Smooth Portfolio Impact

  During periods of market volatility, sharp swings in equity markets can impact your portfolio. Since gold often moves differently, gold ETF FoFs may help reduce the overall impact of these fluctuations.

  In simple terms, when equity markets struggle, gold exposure may help offset part of the downside.
   

• Supports Portfolio Balance

  Having some allocation to gold ETF FoFs can help maintain balance during uncertain times. Instead of relying on a single asset class, your portfolio aims to benefit from diversification.

  This balanced approach may also help you stay invested during market downturns, rather than reacting to short-term movements.

   

Here’s a simple gold ETF FoF allocation guide investors may use: 
 

1. Consider SIP Investing

Instead of investing a lump sum, you may consider a systematic approach when investing in gold ETF FoFs. SIPs allow you to spread your investment over time, which can be helpful to tackle price volatility and also use market opportunities. 

Investing a fixed amount regularly in a gold ETF fund of funds may help you:

• Avoid the need to time the market and look for dips as entry points

• Buy more gold ETF FoF units when prices fall 

• Average investment costs over time

• You may also be buying lesser units when prices rise

2. Utilise Digital SIP Calculators

Fine-tune your allocation to gold ETF FoFs with tools like a gold ETF FoF SIP calculator. These SIP calculators help you plan your contributions and are available for free online. You can use SIP calculators too:

• Fix your SIP contribution

• Decide on your investment horizon

• See how your estimated returns may change with changes in SIP amount and tenure

3. Avoid Over-Exposure to Gold

Gold can play an important role in a portfolio, especially during volatile market phases. However, allocating too much to gold ETF FoFs may limit your exposure to growth-oriented assets like equities. 

Therefore, it may be a good idea to use gold as a balancing component rather than the core of a portfolio. Here’s how you can approach this:

• Consider the 10% gold rule: This is a popular thumb rule for gold investing, where you allocate 10% of your long-term portfolio to gold. However, remember that this isn’t a blanket rule. You may consider allocations between 5%-10% (or a customised one) based on your risk appetite and goals.

• Focus on diversification: Gold is often added as a diversifier in a portfolio, rather than a core allocation. So, you may consider gold ETF FoFs to aim to add cushioning to your portfolio rather than allocating a lot to gold at once.

• Review your allocation periodically: Consider reviewing your gold ETF FoF allocations annually. along with the rest of your portfolio. This will help you see if your exposure to gold is still within your original percentage or if it has exceeded due to a market rally and needs rebalancing. 

   

4. Understand Risks and Taxation

While gold ETF FoFs offer convenience, they are still market-linked and come with certain risks. Their returns depend on gold prices, which can fluctuate due to global factors. It is also important to understand how these investments are taxed.

• Gold prices can be volatile in the short term

• Domestic gold prices are linked to international gold price movements and geopolitical events

• STCG is applicable at slab rates on gold ETF FoFs sold before 12 months, while LTCG is applicable at 12.5% on units sold after 12 months

   

So now you know that investing in gold ETF FoFs can help manage market volatility since gold may move differently than other asset classes. 

The key to this is not waiting for volatility to start or end. It is to stay consistent with strategic allocation through SIPs. SIPs in gold ETF FoFs can help:

• Avoid market timing risks 

• Capture potential opportunities post price dips

• Smooth out short-term volatility impact

At the same time, you should also understand the risks of the investment, consider your goals and risk appetite to determine a suitable allocation percentage. Keep in mind that gold ETF FoFs may work well as satellite allocations in well-diversified portfolios, rather than core holdings. 

1. Who should consider investing in gold ETF FoFs?

• Gold ETF fund of funds may be considered by:

• Investors who want to buy gold ETFs indirectly through the mutual fund route

• Those who want exposure to gold without opening a Demat account 

• Investors with equity-heavy portfolios seeking diversification with gold exposure
   

2. Why should I avoid stopping SIPs in gold ETF FoFs when gold prices are volatile?

Stopping your gold ETF FoF SIPs during price volatility can:

• Disrupt cost averaging and long-term discipline

• Lead to missed opportunities as market dips allow you to accumulate more units

• Impact returns from potential recovery over time
   

3. Does gold always rise when equities fall?

No, gold does not always rise when equities fall. While gold often behaves differently from stock markets, the relationship is not consistent. There can be periods when both gold and equities move in the same direction. Gold is mainly used for diversification and may help balance a portfolio, but it is not a guaranteed hedge against equity market declines. 
 

4. What are the risks associated with gold ETF FoF investments?

One of the most significant risks to gold ETF FoFs is short-term price volatility in gold. Even if you invest via SIPs, regular contributions do not guarantee zero price dips. Gold prices can move sharply based on geopolitical situations, economic changes, and policy reforms. 

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