Investors hold on to gold ETFs even as prices slump after custom duty cut

Adjusted for fall in NAV, AUM of gold ETFs remain unaffected

With domestic gold prices sliding following the sharp cut in Customs duties announced in the Budget, the net asset value (NAV) of gold exchange-traded funds (ETFs) took around a 5 per cent hit on Tuesday.

However, data shows investors avoided any knee-jerk reaction.

The assets under management (AUM) of gold ETFs, which stood at Rs 34,868 crore on Monday, declined 5.2 per cent to Rs 33,155 crore on Tuesday.

Adjusted for the mark-to-market losses (decline in NAV), the AUM is almost unchanged.

On the National Stock Exchange, gold ETFs were trading at a premium to NAV on Tuesday, at least in the latter part of the session.

Nippon India ETF Gold BeES, which is the largest in terms of AUM at Rs 10,941 crore, ended the session on Tuesday at a price of Rs 60.16 per unit, compared to its NAV of Rs 58.62. The volumes swelled to 26.8 million compared to 7.6 million on Monday.

The ETFs declined around 1 per cent on Wednesday.

According to investment advisors, existing investors may have decided to stick to their investments as prices slumped immediately after the announcement and considering the tax implications. They added that some investors may have deployed money to buy ETF units after correction.

“Exiting investments in gold with a plan to re-enter at a lower price may not be the right thing to do, considering the tax implications. As investors have made a good amount of gains from their gold investments in the recent past, they would end up paying a significant amount of tax. Changing the investment strategy just because of the change in import duty is not warranted,” said Vishal Dhawan, founder and chief executive officer of Plan Ahead Wealth Advisors.

According to experts, the slump in gold prices could have been higher if the yellow metal was not already trading at a discount.

“The market was already pricing in a 2 per cent cut as the discount as per parity (pre-Budget) reached Rs 1,500. According to the announcement, the government will charge 5 per cent basic Customs duty and 1 per cent in agriculture infrastructure and development cess on gold and silver imports, lowering import duties to 6 per cent from 15 per cent. This move could lift retail demand and help cut smuggling activities,” said Navneet Damani, group senior vice-president and head of commodity and currency research at Motilal Oswal Financial Services.

Damani said the outlook on gold remains positive, citing geopolitical tensions, rate-cut expectations by the US Federal Reserve, and demand from central banks.

“The recent fall was on the back of duty changes announced by the government. Once prices settle as per parity, we should see some stability. According to the revised rates, parity for gold is at Rs 68,000 and for silver is at Rs 83,000,” he added.