Investors continue to be bullish on gold ETFs

Investors pumped Rs 491 crore in gold exchange traded funds (ETFs) in February as they seem be taking advantage of the lower domestic prices caused due to declining international rates, appreciating rupee and reduction in custom duty.

This came following a net investment of Rs 625 crore in January and Rs 431 crore in December.

Prior to this, gold ETFs had seen an outflow of Rs 141 crore in November, data available with Association of Mutual Funds in India showed.

Continuing flows in gold ETFs further indicate increased acceptance of these efficient forms of owning gold.

"With gold prices having corrected by 9 per cent in 2021, gold investors are showing maturity and further adding gold on corrections.

“Gold ETFs saw net inflows of Rs 491 crore in February, following the Rs 625 crore net inflows in the first month of the year," Chirag Mehta, senior fund manager, at Quantum Mutual Fund said.

According to him, Indian investors seem to be taking advantage of the lower domestic prices caused due to a combination of falling international gold prices, appreciating rupee and reduction in custom duty.

He, further, said investors are allocating to the strategic asset at lower levels given that the macroeconomic backdrop of low interest rates, monetary expansion, debt accumulation and higher inflation looks conducive for the asset class over the medium to long term despite some near term weakness.

"We expect this trend to continue as investors appreciate the risk-reducing, return-enhancing role gold plays in an investment portfolio and maintain their gold allocations at 10-15 per cent," Mehta said.

Gold ETFs had attracted Rs 6,657 crore last year.

Barring March 2020 and November 2020, such instruments had seen net inflow in the entire preceding year.

In comparison, such category had seen net investment of just Rs 16 crore in 2019.

Himanshu Srivastava, associate director – manager research, Morningstar India, said gold functions as a strategic asset in an investor's portfolio, given its ability to act as an effective diversifier, and alleviate losses during tough market conditions and economic downturns.

During the challenging investment environment over the last few years, gold emerged as one of the better performing asset classes, thus proving its effectiveness in investors' portfolio. Expectedly, this has attracted investors’ interest, he added.

"Now with gold price coming off its all-time high touched in August last year has provided a good buying opportunity to investors, which resulted in net inflow for the category in February," Srivastava said.

The asset base of gold funds was at Rs 14,102 crore at the end of last month compared to Rs 14,481 crore at the end of January 2021.

Photograph: Michael Dalder/Reuters