Investment in Indian Gold ETFs Soaring


"Investors in India have ratcheted up their purchases in exchange-traded funds that aim to track the price of gold. For the month of February, gold ETF assets under management in India soared to 97.95B rupees (US$1.96B), up 161% from a year ago."

Even as Indians shy away from buying gold jewelry due to the current high price, demand for gold as an investment is soaring, with new gold ETF launches at an all-time high and assets nearly tripling by the end of February.

Investors in India have ratcheted up their purchases in exchange-traded funds that aim to track the price of gold. For the month of February, gold ETF assets under management in India soared to 97.95 billion (b) rupees (US$1.96B), up 161% from a year ago.

Data from the Association of Mutual Funds in India showed that total assets of gold ETFs jumped to the 97.95B rupee figure as of Feb, 29, from 37.44B rupees a year ago.

India has 12 gold ETFs as of now. Two more were launched last week. Data shows assets under management had nearly tripled at the end of February and that the number of folios is set to increase further over the next three months.

Analysts tracking the scene said other than a rise in traditional investment routes in gold, a sharp rise in the price of gold over the past year has pushed many gold retail investors to the mutual fund route. "As gold prices continue to soar, more asset management companies that run mutual fund schemes have begun to launch gold-related plans,'' said Sunder Manish, bullion analyst.

Motilal Oswal Asset Management Company launched its gold exchange-traded fund recently, even as Birla Sun Life Asset Management Company, the fourth largest asset management firm in India, launched a gold fund. Several others are waiting in the wings. Manish said Canara Roboeco Asset Management Company is also planning to roll out its gold ETF this month.

Analysts said at the end of February, spot gold prices in Mumbai had soared 38% from a year ago to $575.27 (28,750 rupees) per 10 grams (g) (nearly $1,850 an ounce). They added that despite the strong rally in the precious metal last year, gold prices are expected to shoot up further in the coming years, and that it is this phenomenon that will attract more investors to the ETF route.

"Indian investors like to see the past performance and then place their money. The gold collections of ETFs have risen from 15 tonnes in 2010 to 30 tonnes in 2011; it has been an increase of 100%. It is not very late for investors who missed the rally last year, for gold prices are expected to rise further in three to four years,'' said Rahul Jain at an asset management company in Mumbai.

He added that a new high in gold prices in rupee-terms has been witnessed this year itself, which has propelled more back benchers to rush in and invest in a gold ETF.

The first five India gold ETFs were launched in 2007 and are managed by Benchmark Asset Management, UTI Mutual Fund, Kotak Mahindra Mutual Fund, Reliance Capital Asset Management and Quantum Mutual Fund. Then followed the SBI Gold Index, launched by the State Bank of India. It is benchmarked against the London AM fix price (the spot price set in the morning). Its gold is imported by the Bank of Nova Scotia.

"Like other gold ETFs, an Indian gold ETF provides a convenient, low-cost way for investors to bet on gold prices or hedge their portfolio exposures. ETFs here will continue to rise in popularity,'' said Sunil Tiwari, bullion analyst.

According to data provided by the Association of Mutual Funds in India, the industry body of the 6.42 trillion rupees Indian mutual fund industry, gold ETFs recorded their highest monthly inflow ever in September 2011. A total of $246 million (1,234 rupees crore) came into gold ETFs in the month of September alone, which was more than half of what the firm collected throughout the calendar year 2010.

Assets under management jumped 2.7 times over a year ago, to $1.71B in September 2011, while the Indian gold price rose 35% and the Indian stock market tanked about 17% during the same period.

New Schemes

Though India had the largest appetite for gold last year, with demand touching 933.4 tonnes, for the first time Indian retail investors in gold ETFs will get a chance to take physical delivery of the precious metal.

Motilal Oswal Mutual Fund, which launched its gold-based ETF, has said it will allow investors to take physical delivery in minimum 10g bars, a first for Indian markets.

Analysts said though a dozen gold ETFs have been launched in the country, they allow only market participants to take delivery of physical gold at minimum 1 kilo. The Motilal Oswal gold ETF is an open-ended ETF that invests in bullion.

"The redemption of the units in minimum 10g gold bars will be done in association with RiddiSiddhi Bullions acting as primary authorised participants and market makers,'' said Nitin Rakesh, CEO, Motilal Oswal Asset Management.

The physical delivery facility will be available across 22 cities in India. The CEO went on to add, "This is a unique offering as it offers the best of both worlds: investment cum consumption in a very cost effective manner.''

By taking physical delivery of gold bars, investors will be able to buy pure gold much cheaper than that available in coins and bar form from banks and jewelers, who charge a premium of anywhere between 6% to 17% over the imported gold price.

Birla Sun Life Asset Management Company also launched a New Fund OfferóBirla Sun Life Gold Fund. This is an open-ended fund scheme that invests in Birla Sun Life Gold ETF. The investment objective of the scheme is to provide returns that tracks returns provided by Birla Sun Life Gold ETF.

At the time of the launch, A Balasubramanian, CEO, said, "Birla Sun Life gold fund will open opportunities for our investors who invest in physical gold or ETFs. Investors can now enjoy the benefits of investing in gold either by way of a single investment or a systematic investment plan (SIP) without the hassle of opening a demat account or a locker for the safekeeping of physical gold."

The CEO added: "The fund will also allow our investors to invest through SIP with a minimum amount of $20.03 (1,000 rupees) into gold in a systematic manner every month thus making it simple and affordable to build a portfolio allocation to gold.''

Analysts added that rising investment demand in India would prompt many fund houses to start new gold ETFs. With the uncertainty surrounding the equity markets in India still not over, they added investors' money will continue to come to gold.

Shivom Seth, Mineweb

Get Our Streetwise Reports Newsletter Free

A valid email address is required to subscribe