Top Gold ETFs in India offer 29.9% return in a year: Should you invest?

Gold exchange-traded funds (ETFs) in India are witnessing a surge in popularity, driven by their strong performance and the allure of safety amid rising geopolitical tensions.

In India, gold ETFs are passively managed mutual fund schemes that invest in standard gold bullion of 99.5 percent purity. They track the domestic price of gold closely. Currently, there are 17 gold ETFs in India.   Nippon India ETF Gold BeES, HDFC Gold ETF and SBI Gold ETF are the top three gold ETFs in terms of assets managed. 

The average one-year returns was in the range of 29.12 per cent while 3-year and 5-year returns were 16.93 per cent and 13.59 per cent respectively. LIC MF Gold ETF gave the maximum returns on a 1-year, 3-year and 5-year basis at 29.97 per cent, 17.47 per cent and 13.87 per cent respectively, as per an analysis by Icra Analytics, a subsidiary of rating agency Icra Ltd . This is marginally lower in contrast to an average return of 30.13 per cent, 18.03 per cent and 14.88 per cent over a 1-year, 3-year and 5-year period on physical gold.

"Gold ETFs have been increasingly gaining popularity among investors due to liquidity, transparency and global price alignment..With the escalating geopolitical tensions boosting the “safe-haven” appeal of the bullion, investors are preferring to park their funds in Gold ETFs as compared to investing in physical gold as there is no hassle of storing it. Also, there are concerns of purity and theft while investing in physical gold, which is not the case with Gold ETFs," said Icra Analytics in a note.

Gold ETFs have witnessed a seven-fold surge in AUM (Assets under Management) in India in the last five years from Rs 5613.22 crore in September 2019 to Rs 39,823.50 crore in September 2024, and it has now emerged as the flavour of the season ahead of the Dhanteras. Inflows into Gold ETFs have surged by nearly 88 per cent since the beginning of this calendar year at Rs 1232.99 crore in September 2024, up from Rs 657.46 crore in January.

“Investors favour investing in Gold ETFs due to liquidity, transparency, cost-effectiveness, and ease of trading compared to physical gold. The heightened activity in these funds is also driven by the prospects of an interest rate cut by the U.S. Federal Reserve in the coming months,” said Ashwini Kumar, Senior Vice President and Head Market Data, Icra Analytics.

India is estimated to be the second-largest gold consumer in the world after China. There were expectations of high gold demand during the festive season following the government's import duty cut in July 2024. However, there are concerns that high gold prices may dent investor sentiment as the same may tighten the spending power of many buyers. Moreover, buying physical gold comes with its fair share of risk including storage, theft and impurities thereby impacting the returns. Gold ETFs are comparatively safer as they are governed by tight regulations and are traded on exchanges on a real time basis.

What should investors do? 

“Investors with a short to medium term investment horizon may consider investment through Gold ETFs. A buy on dips strategy in this case may help investors to capitalise on temporary correction in prices. Also, given the current market dynamics where equities are showing mixed trends, a modest allocation to gold may serve as a hedge against inflation and market volatility which may help balance risks in an optimum manner,” Kumar added.
 

Global gold ETFs extended their inflow streak to five months, with North America leading the charge

Globally, gold exchange-traded funds (ETFs) attracted net inflows for the fifth consecutive month in September 2024. The growing geopolitical tensions and anticipation of a rate cut by the U. Federal Reserve have prompted investors globally to flock to safe-haven assets like gold.

According to a recent report by the World Gold Council (WGC), the total assets under management (AUM) of gold ETFs worldwide rose by five percent, reaching $271 billion. In addition, collective gold holdings increased by 18 tonnes, bringing the total to 3,200 tonnes by the end of September.

The trend is particularly pronounced in India, where gold ETFs have seen net inflows for 18 out of the last 20 months, with only two exceptions in March 2023 and April 2024. This data, published by the Association of Mutual Funds in India (AMFI), highlights the enthusiasm among Indian investors for gold as a reliable investment option. As of September 30, 2024, Indian gold ETFs recorded an AUM of Rs 39,824 crore.

September in review

Global physically backed gold ETFs saw their fifth consecutive monthly inflow in September, attracting $1.4 billion.  North America led inflows in September while Europe was the only region that experienced outflows, albeit only mildly. Thanks to continued inflows and a record-breaking gold price, global assets under management (AUM) rose by 5% to $271 billion, another month-end peak.

The US Fed surprised investors with a cut of 50 basis points at their September meeting, pushing Treasury yields and the dollar down during the month. Lower opportunity costs, related to interest rates and the dollar, boosted investor interest in gold ETFs.

Rising geopolitical tensions in the Middle East during the month also helped attract gold ETF inflows as investors sought a safe haven, the report said.

Meanwhile, Asian funds continued to dominate global year to date inflows despite a recent slowdown in demand. 

Gold outflows were mainly from UK funds. "Compared to the US Fed’s easing efforts, the Bank of England (BoE) was more reserved, leaving rates unchanged at 5% at their September meeting, citing the upside risk of inflation from elevated wage growth.  The BoE’s cautious move cooled investor expectation of future rate cuts, and fuelled a sizable rebound in UK gilt yields which coincided with major local gold ETFs’ outflows. In contrast, both Germany and Switzerland witnessed inflows, minor as they are, likely driven by safe-haven demand amid the deteriorating economic outlook, especially in Germany.  Meanwhile, intensifying expectations of a further cut from the European Central Bank (ECB) in October, despite a pause this month, led to notable falls in local yields, and likely contributed to increased gold demand," said the World Gold Council report.