Mumbai: A gold exchange-traded fund (ETF) is a must-have in any mutual fund’s (MF) product basket, say fund managers who are betting on this new asset class taking off on the Indian consumer’s love for the yellow metal.
Mutual funds are hopeful the asset class, which is still in its infancy with the first global launch just three years ago, would become a sizable part of the growing investment market in the country.
“This is a must-have for a country that is the largest consumer of gold,” said Ritesh Jain, fund manager, Kotak Mahindra Asset Management Co. Ltd. “It’s a matter of time before it succeeds.”
Two companies have already launched their products. Benchmark Asset Management Co. Pvt. Ltd’s gold ETF—India’s first—is open for subscription, while UTI Asset Management Co. Pvt. Ltd opens its fund next week.
Five other companies, including Kotak Mahindra Asset Management, Prudential ICICI Asset Management Co. Ltd and Tata Asset Management Ltd, have lined up similar products.
Another asset manager, OptiMix, plans a fund of funds that would primarily invest in gold ETFs. Others are keen to jump on the bandwagon. “Everyone (fund houses) wants to diversify their portfolios and enhance their assets under management,” said Dhruva Raj Chatterji, research analyst with global fund-tracker Lipper, a Reuters company. A fund manager said companies offering gold ETFs were not worried about the slow pick-up they are likely to have.
“The proposition of a gold ETF is very strong,” said Raghvendra Nath, vice-president, Birla Sun Life Asset Management Co. “But no one is expecting miraculous returns...it is an emerging class, it will mature over time.” Birla Sun Life filed papers for its gold ETF last week.
Eventually, fund managers say, it would be retail investors who would deepen the gold ETF market in India. “I think every ETF will do its little bit towards marketing and creating awareness, which will generally expand the market,” said Ashvin Arora, director of OptiMix. “We are looking at (an investment of) may be Rs5,000 crore after 12 months.”
OptiMix would be ready to launch its fund within a month of receiving the regulator’s approval, he said.
Fund watchers said the response to Benchmark’s offering will be keenly watched as it could be a pointer to where gold ETFs are headed. However, its executive director, Rajan Mehta, declined to give any indication as to how much the fund had collected so far. Fund managers said India’s rapidly expanding investment gold market is sizable enough for mutual funds.
Expansion in China and India, the world’s fastest-growing economies, has fuelled demand for the precious metal and raised interest from institutional and individual investors. The yellow metal reached a 26-year high of $730.40 an ounce on 12 May.
“Gold ETFs can create an estimated 90-100 tonnes spread over the next three years, contributing about 5% to the incremental demand from India,” Kotak Commodity analyst Sahil Kapoor said in a report. Demand by funds can “boost gold prices”.
In 2006, India’s investment-led gold buying was at 185.6 tonnes, up 38% on year, and more than a quarter of India’s total gold demand. In the long run, industry watchers said, gold ETFs have the potential to not only expand ETFs’ share in the fund industry, but may even lead to a rise in gold consumption.
Acceptability of gold ETFs could help create more genuine investors in gold and fuel greater demand for the precious metal. Currently, some eight equity-backed Indian ETFs manage only 1.75% of the industry, data showed.
Thomas Kutty Abraham of Bloomberg also contributed to this story