Gold prices spur ETFs 7% in Sept

With gold prices touching an all-time high, Gold Exchange Traded Funds (ETFs) have once again started giving better returns. Gold ETFs registered a sharp rise of 7 per cent in September.

Three gold ETFs are already active in India and fund houses such as HDFC Mutual Fund and Quantum are waiting to launch their own ETFs, while Reliance launched gold ETF very recently.

According to Lipper Fund Market Insight Report, gold ETFs rose 6.96 per cent as a category primarily because of a sharp rise in gold prices.

However, even though international spot gold prices rose close to 11 per cent in the month, spot gold prices in India (Mumbai) managed a relatively lower rise of about 6 per cent during the same period as the rupee strengthened against the dollar.

In the last six months, international gold prices started rising only after the third week of August. In the last two months, it went up from $650 per ounce to $758.

Benchmark's gold ETF has given returns of 6.94 per cent in September. The other two - UTI and Kotak mutual fund - have also given returns of 6.96 and 6.97 per cent respectively. These three ETFs account for a total AUM of Rs 324.77 crore according to the AMFI data for September.

UTI mutual fund's Goldshare is currently trading at Rs 968 per unit, which is quite close to its highest level. Similarly, Benchmark's Gold Bees is trading at Rs 971 per unit and Kotak Gold ETF is trading at its all time high of Rs 977.99 per unit. Gold prices in India are at Rs 9663 per 10 grams.

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 a stock exchange. These are passively managed funds and are designed to provide returns that would closely track the returns from physical gold in the spot market.

The total amount of the yellow metal in gold ETFs around the world as on August 2007 is close to 700 tonnes. Gold ETFs have been a big success the world over and India entered the product class only in March this year.

A sharp rise in crude oil prices and sub-prime woes has made investors more risk averse, thus prompting them to turn to safer investment avenues such as gold.

The weakening dollar and reducing interest in dollar-based assets have encouraged investors to shy away from the dollar and turn to gold as a safer asset. It is also an effective hedge against inflation.

It is also a great tool for diversification. At present, the main investors are High Net Worth Individuals.