Why Gold ETFs are gaining popularity among investors?
Across the world, gold is seen largely as an investment product where the investors, both retail and non-retail, are investing in it for pure economic reasons. In contrast, gold is a majorly consumer product in our country. We Indians buy gold for consumption, typically in the form of jewellery. In India we have a special significance for gold in our culture in a variety of contexts ranging from a form of adornment to a status symbol to an investment for the tough times.
Gold Exchange Traded Funds (Gold ETF) is the unique product offering from the exchange that retail allows investment in gold in dematerialized form through their normal demat accounts. This product is designed to overcome most of the difficulties faced while investing in gold. With Gold ETF there is no risk of losing your precious investment due to theft. Being in the demat form, your investment remains safe from the prying eyes. Another trouble of putting money in physical gold is that a lot of your hard earned money gets spent on making charges (in case of jewellery) or premium pricing (in case of coins or bars from banks). With Gold ETF, the gold is available at the standard international market rates which is available transparently and is devoid of any markups.
Gold Exchange Traded Fund (Gold ETF) was launched in India in 2007 by Benchmark Asset Management Company (AMC), and was quickly followed by few other AMCs. The initial phase witnessed a slow but steady growth in assets, but it was in the past two years that the growth has accelerated rapidly. As on June end, there were 14 players in the Gold ETF domain with a total asset holding of approximately INR 10095 crores.
1. Gold ETF is priced based on the London Bullion Market Association (LBMA) live prices
2. The actual price of one unit of Gold ETF is calculated as the valuation of the total assets under the scheme less the cumulative expenses divided by the total number of Gold ETF units issued.
Gold Exchange Traded Funds (Gold ETFs) have been the flavor of the season in the past year with record volumes in year. Not only we have seen exceptional volumes during the traditional gold buying days of Akshay Tritiya & Dhanteras (See Fig 2), we also have seen a huge increase in the overall volumes in the financial year 2011-12 (see Fig 3).
Over the past year we have seen a huge rise in interest in the product from the retail as well as corporate clientele. A major change seen in the last year was the total domination of retail investors in terms of relative proportion to the total investors in Gold ETF category. The percentage of investors from the retail category grew from 90% in the past financial year to over 97% in the current financial year. Another noteworthy change is the huge 400% growth in the contribution of corporates to the total AUM. In terms of contribution, it grew from 37% in FY 2010-11 to almost 55% in the FY 2011-12 (see Fig. 4)
Figure 4: AUM Classification (Investor catgoery wise)
The higher interest in gold from the corporates seem to be stemming from the current uncertain economic scenario. Gold has proven to be a good hedge against market uncertainties as seen from the historical examples and the same is apparent from the current rally in the gold returns.
In terms of awareness, the investors in India seem to be largely uninformed about the Gold ETF as an investment product with just about 4 lac retail investors invested in this product out of a total investor base of over two crores. We still have a long way to go to bring this product as a mainstream gold based product. Public awareness holds the key to the expansion of investor base in this product category. Gold has always had a high appeal within the Indian populace and we only need more awareness about this avenue for investment in Gold.
Gold ETF is a pure investment product that is traded on the exchange platform. To convert her Gold ETF holdings into physical form, a Gold ETF investor can liquidate his position on the exchange and buy gold or gold based products from the physical market from the proceeds. So strong is the appeal for gold in its physical form that few AMCs have now started offering redemption in physical gold to retail investors . The investors who hold Gold ETF units of these AMCs can opt for redemption in the form of bars and coins, subject to minimum number of units required for conversion.
The key challenge for growth of Gold ETF as an investment asset class is limited awareness. Awareness is the key to a wider acceptance of Gold ETF and we are relentlessly working on it with the different stakeholders in this domain. Another aspect that needs to be focused on is to develop amongst the investors the concept of gold as an investment rather than just another product of consumption.
- Yuvraj Patil
The author is the Product Manager - Retail Investment Products at National Stock Exchange of India Limited