ETFs take baby steps in gold-crazy India

Lack of awareness, complicated investment norms hindering success of 'paper gold'.

It's called 'paper-gold'. With bullion prices scorching at record highs and purchases of the yellow metal virtually drying up, exchange-traded funds (ETF) seem an attractive investment option.

However, one year since the launch of ETFs in India, their success has been limited due to cumbersome laws governing the trade, and passion among Indians to cling to gold in the physical form.

The country currently has five gold ETFs "" UTI, Benchmark, Reliance, Quantum and Kotak "" listed on the National Stock Exchange. Gold ETFs are open-ended mutual fund schemes that put investor money in standard gold. Investors' holding is denoted in units, which is listed on a stock exchange.

Analysts cite lack of awareness on the working of ETFs and complicated investment norms as the reasons for gold ETFs not picking up in earnest in India.

Gold exchange-traded funds posted average returns of 38.36 per cent, 24.67 per cent, 10.96 per cent, and 2.59 per cent across six-month, three-month, one-month, and one-week horizons, respectively.

These funds put together hold just 4-4.5 tonnes of gold. According to the World Gold Council, Indian households own about 15,000 tonnes of gold, comprising around 10 per cent of global stocks.

However, most of it is either stacked in bank lockers or kept as jewellery at home. India, the world's largest importer and consumer of gold, annually buys around 800 tonnes mainly from Switzerland and Australia.

Beside the sentimental value attached to physical gold in India, lack of awareness and too many nitty-gritty involved for investment are also seen as deterrents for potential investors.

Many feel making demat accounts a prerequisite to trade in mutual funds and high annual fees for ETFs is keeping away retail investors.

"People in India won't pay Rs 10,500 per annum as fees to hold gold, as is the case with the ETFs," Hundia said.

In the international markets, gold ETFs have garnered around 930 tonnes in the past three years, whereas their Indian counterparts could manage just a few tonnes in the past one year, said Suresh Hundia, president of the Bombay Bullion Association.

James Burton, chief executive officer, World Gold Council, said not many in India were aware of ETFs."Moreover, these are not accessible products. Less than 5 per cent of Indian households invest in gold ETFs due to certain deterrents, one being the PAN card," Burton said.

Fund officials said though deeper penetration of mutual funds in the country is needed, especially in the rural areas was needed, stipulations like a permanent account number card and know-your-customer norms defeat that purpose.

"Gold ETFs are more useful for the working class," said Bharat Kumar, director of Hyderabad-based research firm, Global Financial Markets. ETFs become totally illiquid when the equity market crashes, he said.

The current market trends show equity markets are under-performing, bonds and fixed deposits are giving negative returns, the real estate sector is not booming either... which naturally compels investors to head towards commodities.

"The number of outstanding units in our fund has increased since in the last 10-15 days indicating that more investors are turning towards gold ETFs," said Rajan Mehta, executive director, Benchmark Asset Management Co.

Benchmark's Gold BEES was India's first gold ETF. Mehta said consistently higher returns by gold-ETFs have proved that people need to have gold in their portfolios.

The advantages of gold ETFs far outweigh the drawbacks, mutual fund officials said. Lower costs, lack of purity issues, easy liquidity, no transportation charges storage problems make gold ETFs attractive, they said.

Contradicting the view there were too many hassles in gold ETF trading, Benchmark's Mehta said, "The foremost advantage of ETFs is the ease of trade."

Through exchange-traded funds, retail investors can take advantage of surging gold prices through a demat account without bothering for transport, insurance or security, said Devendra Nevgi, chief executive officer, Quantum Asset Management Pvt. Ltd.

"People should have 10-15 per cent of their portfolio in gold exchange-traded funds," he advised.

The latest entrant in the segment, Quantum Gold - listed on February 28 on NSE at Rs 680 - is the only listed gold ETF in India to have approximately half a gram of gold as underlying for every unit. "With my fund, people can buy gold with as little as Rs 650," Nevgi said.

"Nobody can steal your ETF, which is not the case with physical gold," Benchmark's Mehta said. "Further, if you redeem your ETF units, you get the equivalent price of gold at that time, whereas when you sell gold you get 10-15 per cent discounted price after deducting making charges etc.," he said.

"With increasing global financial uncertainty and the world's largest economy expected to go into recession, falling dollar and high crude oil prices fuelling inflation, gold is being considered a good hedge against inflation," said Ritesh Jain, fund manager of Kotak gold ETF. "The prospect for gold, and therefore gold-ETFs is good," he said.

Tracking the weakness in the US dollar against major currencies and surging crude oil prices, domestic gold prices have spiralled to record highs. Spot pure gold this week was at a record high of Rs 13,555 per 10 gm, up Rs 385 from Saturday, data from Bombay Bullion Association showed.

With the greenback's relentless slide against other major currencies, investors are increasingly getting lured to dollar-denominated commodities.