Mumbai: More investors are subscribing to gold exchange-traded funds (ETFs), or mutual funds that have gold as the underlying asset, in an attempt to beat inflation that is at a 16-year high and the slump in equity markets. Traditionally, gold has been perceived as the best hedge against inflation.
Classic asset: A woman shops for gold in Ahmedabad. With inflation at a record 16-year high in the country and a slump in the equity markets, investors are turning to gold exchange-traded funds. Photograph: Ajit Solanki / AP
Five gold ETFs that are currently traded in India have seen their assets under management increase 35%, from Rs478.4 crore at the end of January to Rs646.8 crore in July, according to data from the Association of Mutual Funds in India, or Amfi, a representative body of mutual funds.
The five funds are managed by Benchmark Asset Management Co. Pvt. Ltd, Quantum Asset Management Co. Ltd, Reliance Capital Asset Management Ltd, UTI Asset management Co. Ltd, and Kotak Mahindra Asset Management Co. Ltd.
According to Hemant Rastogi, CEO of Wise Invest Advisors, an investment advisory, barring the current phase of correction, gold ETFs have given the best return.
“From an investment point of view, gold has been important for Indians. Now people are understanding and accepting paper gold (gold ETFs),” he said.
According to data compiled by mutual funds industry tracker Value Research, Rs100 invested in gold ETFs a year ago would be worth Rs124.69 now, the best among all categories.
In the comparable period, Sensex, the Bombay Stock Exchange’s benchmark index, has returned 2.84%.
Since the beginning of the year, Sensex has lost at least 27% but most of the stocks have seen higher value erosion as the profitability of companies has been hit by rising cost of inputs, higher interest rates and rising inflation, which is ruling at 12.44%, a 16-year high.
Gold prices have historically acted as a hedge against inflation. In the past, as average inflation shot up from 6.5% in 1977 to 13.58% in 1980, the average annual price of an ounce of gold also increased from $147 to $615, according to a study by ICICI Securities Ltd.
“Gold will continue to do well as it has the highest correlation to inflation,” said Sandesh Kirkire, chief executive of Kotak Mahindra Asset Management Co., which manages an exchange-traded gold fund that has assets worth Rs43.6 crore.
Still, in the short-term, returns on gold could be negative because of the bearish outlook on global commodity prices. Gold prices have dropped from $925.99 in January to $914.07 per ounce in July.
The prices of all global commodities including base metals, food and precious metals have dropped significantly since mid-July, trailing the price of crude oil that started its downslide after touching a record high.
Analysts are now debating whether crude oil and other commodities have entered an interim bear phase within a larger bull cycle as commodity boom cycles historically last for 15 years. Gold and other commodities had largely outperformed equities this year because of a steep slump in stock prices.
However, in the long run, equities are bound to outperform all other asset classes in a growth economy, said Kirkire. “Investors looking to play safe outside equities could still look at gold.”
To be sure, gold ETFs still constitute a miniscule percentage of assets under management of mutual funds. As of July, only 0.1% of the Rs5.3 trillion managed by mutual funds here are deployed in gold.
“The whole idea is to reduce risk by diversification into a asset non-correlated to equities,” said Sanjiv Shah, executive director of Benchmark Asset Management Co. Pvt Ltd, which also manages an exchange-traded gold funds in India. “Investors should not be concerned about short-term cycles but should consider gold purely as an asset to diversify their portfolio.”
Indians are the largest consumers of gold in the world using around 700 tonnes a year.