Gold ETFs going out of favour with investors

The rally in the equities market and adverse regulatory changes on gold import have hit the exchange-traded funds offered by mutual funds

Once popular, gold exchange-traded funds (ETFs) now seem to be losing favour among investors. The commodity’s poor performance through the past three years has hit investment in this product. A 50 per cent rally in the equities market and adverse regulatory changes on gold import have further hit gold ETFs offered by mutual fund houses.

The poor returns from metal can be gauged from the fact that an investment of Rs 100 in gold three years ago is currently valued at Rs 92.6. For the last two- and one-year horizons, every such investment is valued at Rs 84 and Rs 85.6, respectively.

Between 2008 and 2012, gold ETFs had recorded good returns. “The low returns from equities and high returns from gold during 2008-2013 should, in my opinion, be looked as an aberration, not as a guide for the future,” said Prashant Jain, chief investment officer of HDFC Mutual Fund. He added equities were the best asset class for investors with a long-term view, especially in a growing economy such as India.

So far this financial year, there have been net outflows of Rs 931 crore in this asset class, while monthly sales have fallen to a paltry Rs 1 crore. Since June 2013, there have been continuous outflows on a net basis.

After touching a high of Rs 32,01/10g in October 2013, gold prices fell to a low of Rs 26,900/10g in June, a decline of 16 per cent. Currently, it is being traded at Rs 27,450/10g.

“We maintain gold needs to be part of an investor’s portfolio — up to 10 per cent. Incidentally, Indian investors have developed a fancy towards the asset class through the past few years. They need to switch from physical assets to financial assets for potentially higher returns through the next three-five years,” said S Naren, chief investment officer, Prudential Mutual Fund.

In 2011-12, net inflows had peaked to Rs 3,650 crore from Rs 96 crore in 2006-07, when the Indian mutual fund sector first launched gold ETFs for investors.

Experts said the outlook for gold as an investment asset was bleak. Kiran Kumar Kavikondala, director and chief executive, WealthRays Securities, said, “For gold, the fundamentals are looking very weak and its value is expected to fall in the coming year. The US Federal Reserve might raise interest rates early next year, which could shift the focus of investors away from gold to other asset classes such as bonds. The European Union has been facing disinflation and could take steps to stimulate the economy, which could drive gold prices down. Gold futures might trade in the range of Rs 25,000-25,500 in the next six months to a year.”

The gold-ETF investor base is seeing a steady decline. The sector lost about a fifth of the total number of folios since May 2013, when the number had touched a high of 605,000 investors, as there was speculation gold would exceed Rs 35,000/10g. As of now, this segment has only 480,000 folios.

As of August 31, the mutual fund sector had 14 gold ETFs, with assets under management of Rs 7,661 crore.