Data from AMFI shows that the net inflows into gold ETFs have been declining over the past three months. The addition of new folios or accounts too registered a sharp fall
In these pandemic times, gold has lived up to its safe-haven appeal, and has outperformed several asset classes. The yellow metal has delivered a return of 32 percent over the past one year. Retail and high net-worth investors participated in the gold rally by opting for gold ETFs. The gold ETF category attracted net inflows of as much as Rs 6,244 crore and its AUM (assets under management) more than doubled over the past year.
However, recent data compiled from the Association of Mutual Funds in India (AMFI) shows that the net inflows into gold ETFs have been declining over the past three months. Is investor interest in gold funds declining? As the world inches back to normalcy, gold prices are likely to stabilise and even fall eventually. This ‘charticle’ attempts to explore why inflows into gold ETFs have slowed down of late and future trajectory of the yellow metal'
Chirag Mehta, Senior Fund Manager, Quantum AMC says, “In the midst of the uncertainty created by the pandemic, global investment demand for gold drove up prices to new highs of around $2000/ounce as investors chose to park their money in the relatively safer asset class.”
Mehta believes that the slowdown in inflows into gold ETFs is due to two reasons. One, gold prices have moved up quite a bit in the last two years. “That has made investors wait on the sidelines till prices stabilize,” he says. Second, he continues, “investors have got attracted to better short-term performance in equities.”
True to this phenomenon, despite huge volatility, major equity markets across the globe surged to record highs over the past several weeks due to reasons such as new stimulus measures and successful trial of COVID-19 vaccine.
The announcement of successful trial of the COVID vaccine by Pfizer last week had a knee jerk reaction on gold prices. Gold prices corrected by 4 percent due to the renewed risk sentiment. To be sure, gold is typically a hedge that does well in uncertain times.
Registration of new folios decline
AMFI data also reveals that the addition of new folios/accounts in gold ETFs too registered a sharp fall over the last three months. Till August 2020, the monthly growth in folios was more than 5 percent. Now, it has come down to 2-3 percent in September and October.
The total number of folios in gold ETFs as of October 2020 was 7.83 lakh, which rose around 108 percent over the last one year, thanks to the increased participation from retail investors. Currently, the share of retail AUM in gold ETFs is 12 percent.
Traded values stagnate on the exchanges
There are 11 gold ETFs that are traded on the NSE and the BSE, just like shares. You need a demat account to buy and sell gold ETFs. Their total traded volume, which had peaked in August 2020, has now seen a decline since then. The total traded value, adding all the gold ETFs traded on the NSE in August 2020 was Rs 1,686 crore, while in September and October, it was only Rs 847 crore and Rs 501 crore, respectively.
This decline shows waning interest in gold ETFs among investors. Liquidity or the trading volume plays an important part while buying and selling ETFs on the exchanges. In the ETF traded with higher liquidity, the impact cost is lower and you will get units at the desired price.
There are a few gold ETFs traded actively, with relatively higher liquidity. For instance, Nippon India Gold BeES, SBI Gold ETF and HDFC Gold ETF were traded with daily average volume of Rs 19 crore, Rs 5.4 crore and Rs 5.3 crore, respectively, on the NSE.
However, there seems to be increased interest in gold ETFs in November, thanks to the festive season, which may lead to higher inflows and trading volumes.
ETFs with high liquidity, low expense ratios and minimal tracking error
Will the gold ETFs continue to lose sheen?
Experts believe that despite early news of successful vaccine trials, gold prices are unlikely to fall soon. Chirag Mehta believes investors would still continue to invest in gold, “well into next year, supporting gold prices. That's because the COVID-19 pandemic is far from being contained; we are in the midst of a deep global recession, central banks are injecting liquidity and purchasing assets, interest rates globally continue to stay low, government debts and deficits are inching up, threat of inflation is looming, currencies continue to be debased and geo-political tensions are rife.”
There is a cost-efficient and convenient way to purchase gold for investment purposes: gold ETFs.
Nitin Kabadi, Head- ETF Business, ICICI Prudential AMC, says “When compared to physical gold, Gold ETFs offers some distinct advantages such as less worry about storage and theft as it is held in demat form, lower cost of acquisition given the absence of making charges and other related expenses. For those investors looking to meet any future requirement of gold, they can consider doing a SIP for as low as Rs 1000 every month in Gold Fund of Funds. This will enable them to collect gold units over a period of time.”It would be unwise to invest in gold now, expecting past returns to be replicated. But gold is an essential part of your portfolio. Invest around 5-10 percent of your overall portfolio in gold. And keep your returns’ expectations under check.