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Are Gold ETFs losing their glitter?


The proverbial saying ‘All that glitters is not gold’ best describes the current investor sentiment towards gold exchange-traded funds (ETFs). Despite gold emerging as one of the best performing asset classes in FY23, inflows into gold ETFs plunged to a four-year low.

According to AMFI data, net inflows into gold ETFs fell by 74 per cent, year-on-year, to ₹653 crore in FY23 against ₹2,541 crore of inflows in FY22. The drop in net inflows come despite gold ETFs delivering a return of 15 per cent last fiscal against near-zero returns by benchmark S&P BSE Sensex. 

  • Read: Digital gold investment: A new era for investors 
ETF purchases

Anand Varadarajan, Director at Asit C Mehta Investment Intermediates Ltd, said the sharp decline in gold ETF purchases is due to higher redemption on account of ‘profit booking’ as investors made the best out of gold price rally. 

The price of gold futures traded on MCX rallied nearly 30 per cent in the last two years from ₹46,150 per 10 gram as of March 2021 to ₹59,750 in March 2022. 

“Also the past 3-4 years have been interesting for equity investing. People consider gold as a consumption asset class and equity as an investment asset class. So, most of the investors have been considering equity over gold,” Varadarajan added.

Gold ETFs are passive investment instruments that aim to track the price of physical gold. Gold ETFs come in dematerialised (paper) form and one gold ETF unit is equal to 1 gram of gold.

Despite the flat returns and volatility in the equity markets, net inflows into equity mutual funds remained robust at ₹1.47-lakh crore in the previous fiscal. However, the net inflows were 11 per cent lower than record high inflow of ₹1.64-lakh crore recorded in FY22. 

Jayesh Faria, Director, Regional Head — West, Motilal Oswal Private Wealth, said, volatility in global markets due to tightening by central banks, rally in dollar index and US bond yields triggered volatility in precious metals. “These are a few reasons why investors stayed away from gold ETFs despite gold returns in the last one year, Faria added. 

The total assets of gold ETFs however continued to increase at a brisk pace, thanks to the increase in the price of gold. Assets of gold ETFs grew by 18 per cent, year-on-year, to ₹22,737 crore as of March 2023.  

Gold investments

Vivek Geol, Joint Managing Director of Tailwind Financial Services, said investments in gold through other than physical form are still picking up gradually and given the multiple avenues available for e-gold including ETFs, digital gold and sovereign gold bonds, the flows get bifurcated across these avenues. 

Geol also said gold ETFs lost their attractiveness to other platforms as the Finance Bill 2023 removed its tax benefit of lower rate with indexation even as other modes of gold investment continue to enjoy their respective tax benefits. “Considering expense ratio and brokerage applicable on ETFs, investors are starting to prefer physical gold, digital gold as well as SGBs, ” he added. 




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