Gold ETF flows shrink despite superior returns, shows Amfi data

Between October 2021 and September 2022, gold prices rose over 9.5 per cent even as ETF inflows shrunk to a half

Net investments in gold exchange traded funds (ETFs) more than halved in the last one-year ending September 2022, a period when gold outperformed most other asset classes with over 9.5 per cent return.

Data from the Association of Mutual Funds in India (Amfi) shows that investors infused a net of Rs 2,094 crore into gold ETFs between October 2021 and September 2022, as against Rs 4,188 crore during the same period a year ago.

During the same time, gold was staging a recovery after its prices remained subdued for over a year. February 2022 was the first time in 12 months when gold convincingly regained the Rs 50,000 level. The recovery resulted in strong performances for gold ETFs. According to ICRA Analytics' MFI 360 data, five gold ETFs delivered over 9 per cent return in the one-year period ending September 30, 2022. The performance of most other gold ETFs was in the range of 9-8.5 per cent. The Sensex was down over 3 per cent in the same period.

The rally in gold prices in early 2022 (especially February when the prices rose 6 per cent) was mostly a result of rising uncertainties amid escalating tension between Russia and Ukraine.

However, the gold prices have corrected in October, bringing down the one-year return of most gold ETFs to below 6 per cent as on October 20.

According to analysts, gold may see further upside in the medium- to long-term period.

"Macro-economic backdrop does have an upper hand this year, major focus is on central bank’s monetary policy, inflationary pressure, and geo-political tensions. If there are any changes in these factors, we could see some short covering, which could take gold prices much higher and quicker," said analysts at Motilal Oswal Financial Services, adding, that investors can expect an upside of 8 per cent in the medium term and 17 per cent in the long term if they accumulate gold whenever prices are in the range of Rs 46,800 to Rs 47,500.

However, they also stated that prices will remain under pressure till major central banks change their stance. "We feel that till the time we don’t see a change in stance from major central bankers w.r.t aggressive interest rate hikes, we could continue to witness pressure on gold prices," they said.

The London Bullion Market Association has predicted that gold prices would rise to $1,830 an ounce within a year from $1,650 as of Tuesday.

Investment advisors recommend 10-15 per cent allocation to gold in portfolios for diversification, to hedge against equity-market volatility, and for protection against inflation.

MF distributor Viral Bhatt says gold should be a part of investor portfolio but the allocation should be limited to 5-7 per cent. "I see gold only as a hedge against the equity market and not as an avenue to generate returns," he said. 

To be sure, gold ETFs offered by domestic MFs are just one way of investing in the yellow metal and hence, may not capture investor interests fully. Sovereign gold bonds, gold MFs and physical gold are the other popular investment options. While gold ETFs and funds deliver returns in line with the change in prices of gold, the sovereign gold bonds come with the dual benefit of gains through price fluctuations and 2.5 per cent fixed annual interest.