BackGold-linked ETFs see outflows for record 38 months in a row
Amfi data showed Rs183 crore being pulled out of 14 gold-linked exchange-traded funds in July
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Mumbai: Net outflows from Indian gold-backed mutual funds for a record 38 months till July, a month that also saw the highest redemption in more than two years (since June 2014), even though the underlying asset (gold) is performing well and there is investor interest as well.
Gold prices have gained nearly 28% since 1 January.
On Monday, mutual funds industry lobby Association of Mutual Funds of India (Amfi) released the monthly asset under management (AUM) data that showed ₹ 183 crore being pulled out of 14 gold-linked exchange-traded funds (ETFs) in July. That was the highest monthly net outflows in more than three years as investors looked to redeem their holdings to reinvest in gold sovereign bonds and, of course, traditional equity and income fund schemes.
“People are opting for gold sovereign bonds, as you also get an interim interest of 2.75% on a such a bond, and at the end of it, you are also getting the return you would get with a gold ETF," said Dilshad Billimoria, director of investment advisor Dilzer Consultants Pvt. Ltd, adding that while outflows from ETFs have persisted for long, the introduction of gold bonds have accentuated the trend.
“The market of ETF is not yet developed, and there are liquidity issues," she said.
Billimoria, however, acknowledged that from the taxation perspective, the gold bonds were not as effective as ETFs, though there was no difference when it came to valuation.
While short-term capital gains (STCG) for ETFs are taxed at 15%, long-term capital gains (LTCG) are tax free. For gold bonds, the STCG would be taxed as per the individual income tax bracket, while LTCG would be taxed at 20%, taking into account the indexation effect.
“Gold and equities carry a different degree of risk," Billimoria said. Therefore, it is not wise to shift the allocations from gold-based assets to equities, she added.
Not everyone shares the view though.
“Most people had invested in gold ETFs when the going was good, when gold prices are rising. So many people withdrew when gold prices peaked, and people are booking profits," said Raghvendra Nath, managing director of Ladderup Wealth Management Pvt. Ltd.
“We are also advising clients to opt for equity mutual funds. From a long-term perspective, equity funds can give better returns than gold funds," added Nath.
Fund managers agreed that equities and debt were a better asset class than gold, to which Indians have a high affinity historically.
According to Navneet Munot, chief investment officer, SBI Funds Management Pvt. Ltd, fund allocation has moved towards equity and debt schemes.
“Despite the recent outperformance in gold, investors continue to lose interest in gold ETFs. Investors continue to book profits and move that money towards equity and debt schemes," Munot said.
Equity schemes saw inflows for the fourth consecutive month in July. In total, investors allocated a net of ₹ 2,506 crore for investments into the stock market last month as BSE’s benchmark Sensex index rose 3.9% month-on-month, while the BSE 500 index, which highlights a broad representation of the Indian stock market, rose 5.05% in July 2016, data showed.
The spot price of gold has climbed 19.73% since the first tranche of gold bonds was issued on 5 November. Spot gold on MCX is up 23.61% so far this year and it closed at ₹ 30,895 per 10 grams on Tuesday.
Over the last five years however, while Sensex has risen 65.37% , MCX Gold is marginally down 0.09%, justifying the attractiveness of equities from a long-term perspective.
Income funds saw net inflow to the tune of ₹ 43,913 crore in July 2016, taking the January-to-July tally of net inflows to ₹ 82,787 crore.
Both equity and income funds saw the average AUM size rise more than 17% each since January to ₹ 4.5 trillion and ₹ 6.69 trillion, respectively, data showed.
Mutual fund experts said the outflow in gold funds also highlights the growing dichotomy in the mindset of a typical Indian investor vis-a-vis his global peer, who is more focused on prospective returns than past performance.
A. Balasubramanian, chief executive of Birla Sun Life Asset Management Co. Ltd, said that gold ETFs as an asset class have not seen major allocation and the outlook will remain muted in the near-to-medium term.
“Although investors remain attracted to gold as commodity, actual and future allocation in gold ETFs will remain limited. The trend will not change due to the investors’ experience for the past few years. Major allocations continue towards equity and fixed income and such schemes will continue to benefit at the cost of gold-backed and real estate schemes," said Balasubramanian.
Amfi data shows that AUM of gold-backed ETFs account for 0.43% or Rs.6,499 crore of the total industry AUM of ₹ 15.18 trillion as on July 2016, and looks minuscule when compared with SPDR Gold Shares, the world’s largest gold-backed ETF. SPDR has an AUM of more than $41.84 billion ( ₹ 2.8 trillion based on current exchange rates), up 90.82% since 1 January. The fund’s gold holding has also increased by 51.6% to 31.30 million ounces, its own data showed.
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