In August 2023, gold exchange-traded funds (ETFs) saw an influx of Rs 1,028 crore, marking their highest monthly inflow in 16 months. This massive inflow is noteworthy, considering gold ETFs’ traditional role as hedge, unlike assets, such as stocks or bonds that are used for higher returns.
Gold ETFs are similar to investments in physical gold and were typically used to protect value, which is relevant in this huge inflow in light of the ongoing global political tensions, hawkish signals from the US Federal Reserve, indications of a recession in Germany, and warnings of recession in the US and Europe by experts. In terms of returns too, they fared very well, with the average category returns being 18.99 per cent for one year.
Says Dev Ashish, a Securities and Exchange Board of India (Sebi)-registered investment advisor and Founder of StableInvestor: “While it is tempting to try and perfectly time the gold price cycles, more so in the current geopolitical and economic backdrop, it is easier said than done. However, one can consider gold as part of a long-term asset allocation. Also, conservative investors can consider a 5-15 per cent exposure in gold for long-term investment.”
Gold ETFs have attracted significant attention from investors, with inflows of Rs 1,028 crore in August 2023. This surge comes after an inflow of Rs 456 crore in July this year. Earlier in the year, gold ETFs saw an inflow of Rs 298 crore in the April-June 2023 quarter, breaking a streak of three consecutive quarters of outflows.
The trend continued in August 2023, marking the highest monthly inflow since April 2022 when the category drew Rs 1,100 crore amid the Russia-Ukraine conflict. In August 2023, gold ETFs saw a rise in folios by 20,500 to a total of 4.79 million. Gold ETF assets under management (AUM) increased by over 4 per cent to Rs 24,318 crore from Rs 23,330 crore in the previous month.
ICICI Prudential Gold iWIN ETF from India and Huaan Yifu Gold ETF from China attracted the largest inflows globally at $104 million and $171 million, respectively, the World Gold Council said in a recent report.
Gold ETFs are exchange-traded funds that track the price of physical gold in the domestic market. They are one of the many ways in which investors can gain exposure to gold without owning physical gold. Each unit of a gold ETF corresponds to 1 gram of physical gold, making it accessible to investors of all sizes.
These ETFs combine the flexibility of stock investments with the simplicity of gold investments. Investors can sell gold ETFs on the stock exchange through a broker, using a dematerialised and trading account. Upon liquidation, they will receive payment based on the current domestic gold market price.
ETFs are considered a tax-efficient way to hold gold, as the income earned from them is treated as long-term capital gain (LTCG).
In recent times, gold prices have come down from their all-time high, which has presented investors with a buying opportunity, especially after a sharp rally earlier this year.
As of September 19, 2023, the price of gold in India stands at Rs 5,180 per gram, up from Rs 4,286 exactly a year ago, according to WGC data. On May 4, 2023, the price had spiked to Rs 5,405. The price curve of gold in India also reinforces its attractiveness. Notably, the price of physical gold is the sole factor influencing gold ETF prices.
Among the 11 ETFs listed on the Association of Mutual Funds in India (Amfi) website, the average one-year category return is 18.99 per cent, while the three-year return is 3.65 per cent. This suggests that ETFs have recently entered a bull run and can be considered for short-term investments if one is seeking returns instead of investing in gold as a hedging tool.
“Though one can allocate 5-15 per cent to gold, given the recent changes in the taxation status of gold ETFs, they have become far less attractive in comparison to sovereign gold bonds (SGBs) for investors with a long investment horizon,” says Ashish.
Also, the low or even negative correlation between gold and equities further enhances its role as a diversification tool. As the global equity market saw outflows in August 2023, this can provide support to the price of the yellow metal.
