Gold ETFs acquire patina of 4-year low investment in FY23, shows data

Returns, however, beat other asset classes

Gold burnished its image as the go-to asset class during turbulent times. However, investors seemed to have missed the bus. Net inflows into gold exchange-traded funds (ETFs) plunged to a four-year low of Rs 653 crore in 2022-23 (FY23), even as gold emerged as the top-performing asset class.

Gold ETFs delivered returns of 14 per cent last financial year. By comparison, the benchmark S&P BSE Sensex and the National Stock Exchange Nifty delivered near-zero returns.

Investment advisors say that investor interest in any asset class is driven by past returns. Since equities delivered the highest returns in 2020-21 (FY21) and 2021-22, investors continued to flock to that asset class in FY23.

Gold ETFs had raked in close to Rs 7,000 crore in FY21 as they delivered over 37 per cent returns in 2019-20. However, FY21 proved to be a lacklustre year for gold and a blockbuster one for equities, with the Sensex climbing 68 per cent.

“Money flows into the best-performing asset class. Interest in gold dried up after its poor performance FY21,” says Nitesh G Buddhadev, founder, Nimit Consultancy.

Even as gold’s performance has improved in recent months, experts believe that investors might be waiting on the sidelines to enter at better prices.

“Investors may be waiting for some correction in prices. Also, some flows could have shifted to debt funds, given the rise in yields,” says Dev Ashish, founder, Stable Investor.

Even as returns improve, gold ETFs face a new challenge in the form of loss of indexation benefit. Changes brought in tax laws will lead to a higher tax outgo for gold ETF investors. Experts see the development as disrupting flows into the product.

In India, gold prices remained at about Rs 52,000 per 10 gram in the first eight months of FY23 before picking up to Rs 60,000 by the end of the year. The surge in prices — underpinned by a depreciation of the rupee and an uptick in global prices — ensured double-digit returns for gold ETF investors. The ETFs delivered 12-13 per cent returns during the period.

“Gold has continued its outperformance of 2022 in the first three months of 2023, led by softness in bond yield and a moderation in the dollar index, compared to a few months ago. The challenges in the US and European banks have led investors to move towards a flight for safety, leading to gold prices climbing up 7 per cent in rupee and 8 per cent in US dollar terms in March 2023,” observes Axis Securities in a report.

The brokerage expects further upside in the months to come.
 

“A clear direction is likely to emerge only when volatility settles at lower levels for a longer time. Until then, gold will continue to find an edge over other asset classes. Fundamentally, gold prices are inversely correlated with bond yield direction. Based on the current macroeconomic development, gold will continue to be the preferred asset class until uncertainties over the Russia-Ukraine conflict fades. It will continue to attract investments as a proven hedge against other asset classes,” the report adds.

Flows into gold ETFs are not the only yardstick to gauge interest in the yellow metal, given there are several other avenues such as sovereign gold bonds, physical gold, and e-gold.