The domestic share market may have gone from strength to strength in May, but mutual fund investors still preferred the safe-haven bet of investing in gold exchange-traded funds (ETFs), market participants said.
Data from the Securities and Exchange Board of India (Sebi) indicate that the combined net addition of investors in equity-linked and other ETFs lagged behind gold ETFs during the month.
| Number of investor accounts across various categories of funds | |||
| Category | April | May | Change |
| Gold ETF | 90,712 | 1,13,046 | 22,334 |
| Equity | 3,29,30,693 | 3,29,41,980 | 11,287 |
| ELSS | 82,14,169 | 82,20,584 | 6,415 |
| Other ETF | 24,340 | 24,877 | 537 |
| Gilt | 56,003 | 51,428 | -4,575 |
| Source: Sebi | |||
Ironically, although physical demand for the yellow metal has remained subdued because of high prices, gold ETFs have managed to buck the trend and register growth in investments during the last few months.
“Buying in gold ETFs has been witnessing a rise across the globe as investors want to diversify their portfolio. So, along with equities, they are also investing in gold schemes,” said Sanjiv Shah, executive director with a pioneer among ETFs, Benchmark Mutual Fund.
Safe-haven buying
Safe-haven buying enthused investors to enter gold ETFs, while a persistent rise in local share market in May also aided inflows up to a certain extent. On May 29, the Mumbai spot pure gold had hit a six-week high of Rs 15,000, thus spurring demand for gold ETFs that track domestic gold prices.
Gold ETFs added 22,334 new investors, the highest number registered by any mutual fund scheme in May, according to data available on the Sebi website.
“Yes, I would agree that more folios have been added into gold ETFs. However, if I may add, the interest in gold has been selective as gold prices have been high,” said Lakshmi Iyer, head-fixed income and products, Kotak Mahindra Mutual Fund, who also manages a gold exchange-traded fund.
In May, the Bombay Stock Exchange’s Sensex and the National Stock Exchange’s Nifty rose 28.26 per cent and 28.07 per cent, respectively. Diversified equity schemes witnessed 11,287 fresh investors and tax-planning funds 6,415.
As many as 537 new investors invested in equity exchange-traded schemes.
“Many investors who were hit by the 2008 slump in equity market are gradually putting money back into the market, but have also realised that gold’s safe-haven status will always ensure steady returns,” said a fund manager with a private mutual fund.
In May, investor accounts under gilt schemes fell by 4,575 as they were hit by rise in bond yields after the Union government’s decision to increase auction size to Rs 15,000 crore from Rs 12,000 crore. The move took the market by surprise, leading to redemption.
Higher government borrowing programme for 2009-10 (Apr-Mar) and prospects of revival in the global economy led to volatility in bond prices.
Returns
Last month, gold ETFs delivered an average return of 2.16 per cent, while over a period of one month until Thursday, gold ETFs posted 0.46 per cent return. Among five gold ETFs, UTI Gold ETF registered the highest return of 0.51 per cent followed by Reliance Gold ETF and Quantum Gold ETF with 0.50 per cent each.
However, Gold Benchmark ETF and Kotak Gold ETF were laggards with 0.39 per cent average return for the month ended Thursday.
Gold prices, which were moving northwards, tempted investors to diversify their portfolio into gold ETFs, a mutual fund distributor said.
Further potential
Investors were still waiting on the sidelines because of elevated prices and so there is likely to be more interest in gold ETFs once there was some correction in domestic prices of the yellow metal, Iyer said.
Analysts expect gold prices to weaken slightly in the near-term as the global economy shows signs of recovery, but overall the prices may remain high because uncertainty continues to prevail in the economy which could lead investors to buy ETFs on dips.
Kishore Narne, head-research, Anand Rathi Commodities, said that after a sharp downturn, the dollar index — comprising six major currencies — was likely to recover to 80 points this month, from the 75 plus level at present.
“This could take (overseas) gold down to $925 an ounce in the short-term. But a bounce-back from these levels can take the metal to $1,020 in August,” Narne said.
Narne expects the rupee to strengthen further to 46.80 against the dollar, which could bring down the gold prices in India to Rs 14,000-14,200 per 10 gm this month.
