Gold ETFs see nearly 4x surge in inflows amid strong investor demand and global uncertainty

Among Gold ETFs, Nippon India Gold ETF leads with assets under management (AUM) of Rs 15,247.92 crore, followed by SBI Gold ETF (Rs 2,468.54 crore) and HDFC Gold ETF (Rs 2,287.29 crore). Over one year, most funds delivered returns between 21-22% with Kotak Gold ETF Fund, LIC Gold ETF, HDFC Gold ETF and Mirae Asset Gold ETF leading the charts.

A safe haven

Anil Ghelani, Head of Passive Funds and Products at DSP Mutual Fund believes that there is a structural shift in investor behaviour towards gold as a diversification tool.

“Over the past 6-7 months, fund houses, including ours, have been advocating for diversification into real assets like gold and silver. Multi-asset funds, which typically allocate 10-20% to gold, have made it easier for retail investors to gain exposure to the asset class,” he said.

Shweta Rajani, Head of Mutual Funds at Anand Rathi Wealth concurred, and said, “Equity markets had phenomenal returns until a few months ago, but recent global uncertainties -- such as the US and Indian elections -- have made equity markets volatile. In such situations, people tend to shift towards safer assets like gold and ETFs.”

Interestingly, taxation reforms have further boosted demand. “The removal of taxation inefficiencies in the recent budget has created a positive environment for Gold ETFs, leading to steady inflows over the past 10-12 months,” says Ghelani.

Meanwhile, the lack of new sovereign gold bond issuances has also channelled investments into Gold ETFs. Additionally, geopolitical tensions, such as the Russia-Ukraine conflict, have boosted gold returns and reinforced its appeal as a safe haven.

“While gold has been volatile recently, its overall performance this year has been strong,” Ghelani says adding that multi-asset funds have also played a key role in attracting retail investors.

“Over the past few years, several multi-asset funds have been launched, making it easier for investors to gain exposure to gold through diversified portfolios,” he said.

Such funds allocate 10-20% of their portfolios to gold, predominantly through Gold ETFs, ensuring even small portfolio allocations include gold exposure.

Risks and Outlook

Despite the strong demand, risks remain. In their recent market outlook for 2025, Kotak Securities analysts noted that the year 2024 was a standout for commodities, with gold reaching an all-time high of $2,801.8 per ounce, driven by strong central bank demand, geopolitical tensions, and growing industrial applications in green technologies.

“As we move into 2025, gold and silver are expected to retain their strength, bolstered by safe-haven demand and industrial needs, though a strong dollar and Trump's economic policies could temper gains,” stated the report.

Gold also could see sensitivity from ongoing geopolitical events. “Ceasefire talks in geopolitical conflicts recently caused a 3-4% dip in gold and silver prices,” Ghelani noted.

Gold's industrial uses, such as in semiconductors, and its inverse correlation with the US dollar also influence prices. “If the dollar strengthens due to economic policies or fewer rate cuts in the US, it could pose a risk to gold prices. However, historically, rate cut cycles by the Federal Reserve have been positive for gold,” Ghelani explained.

Srivastava highlighted the importance of inflation trends. “High inflation makes gold an attractive investment as it acts as a hedge. However, as interest rates and inflation decrease, and the economy improves, equities could outperform. This raises the question of whether there will be a shift from gold to equities,” he said.

However, not all experts are optimistic about sustained inflows into Gold ETFs. “The kind of jump we have seen in gold ETF demand is unlikely to continue. Over a five-year horizon, gold has delivered around 14% returns, while equities have provided approximately 16%, with diversified portfolios yielding even more,” says Rajani.

“Historically, gold prices go through long periods of stagnation. Much of the uncertainty caused by events like COVID-19 and geopolitical tensions is already priced in, suggesting the gold cycle may be turning,” she said.

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