Gold ETFs fare well, beat inflation

Gold exchange traded funds (ETFs), a product that made a debut in Indian market in 2007, have managed to post good returns this year.

They gave returns higher than inflation as gold is considered as hedge against inflation. It is also seen as a tool for diversification for the fund industry.

While gold ETFs are still in a nascent stage in the country, such funds are expected to perform much better next year at least in terms of growing assets under management. If prices of gold remain firm internationally, returns from such funds will also be attractive.

Gold prices generally follow global market and in India prices also depend on exchange rates of rupee. If rupee strengthens from the current level, then any increase in global prices will not benefit Indian investors to that extent.

Currently, there are four gold ETFs, from Benchmark, UTI, Kotak and Reliance Mutual Fund, listed on exchanges. Gold ETFs are open-ended mutual fund schemes that invest the money collected from investors in standard gold bullion (0.995 purity).

The investor's holding is denoted in units, which gets listed on stock exchanges. These are passively managed funds and are designed to provide returns closely tracking the returns from physical gold in the spot market.

UTI mutual fund's gold share has given returns of 9.72 per cent since its launch and is currently trading at Rs 1009 per unit. It manages assets worth Rs 135.03 crore.

Similarly, Benchmark's Gold Bees, the first such fund to be floated in India, gave 10.32 per cent returns since its launch in February and manages assets worth Rs 129.61 crore.

November has not been good for these funds as ETFs gave only 0.31 per cent returns. This drop in returns can be attributed to the fall in gold prices during the month.

Even now, gold prices are somewhat subdued compared to their earlier highs. Considering that India is world's largest consumer of gold, prices of the yellow metal in the country are at Rs 10,300 per 10 gram.

Kotak's gold ETF has been one of the best performers by posting returns of 18.55 per cent, though its assets under management are quite less at Rs 49.10 crore only. Reliance Mutual Fund, which ventured into this product class only recently, manages assets worth Rs 145.33 crore.

A sharp rise in crude oil prices and sub-prime woes have made investors more risk averse internationally, thus prompting them to turn to safer investment avenues such as gold. The weakening dollar and reducing interest in dollar-based assets have also encouraged investors to turn to gold as a safer asset.

Total gold in gold ETFs around the world, as on August 07, is close to 700 tonnes. Gold ETFs have been a big success the world over and India entered the product class only in February this year.

Says Dhruva Chatterjee, research analyst, Lipper, "The current year has been very good for gold as a commodity, which also translated into better performance for gold ETFs. It has a strong international demand and, with inflation and interest rates rising, it is only going to be favoured as a risk-averse asset class. However, institutions need to buy into this product offering, and then only assets under management can go up. At present, only HNI and retail investors are interested in this asset class. But as awareness grows, it will see a rise in assets."

GLITTERING STREAK

Kotak's gold ETF has been one of the best performers by posting 18.55 per cent returns

Benchmark's Gold Bees, the first such fund to be floated in India, gave 10.32 per cent returns

UTI Mutual Fund's gold share has given returns of 9.72 per cent

Reliance Mutual Fund's ETF is the fourth listed such fund in India, which entered this product class only in February this year