When Benchmark Asset Management Company Pvt. Ltd launched India’s first gold exchange-traded fund (ETF) in March this year, market wisdom suggested that Indian investors would lap it up. After all, Indians are the world’s largest consumers of gold. Around a fourth of the world’s gold is bought in India. A fund, which assures investors of the quality of gold, stores it for them for just a 1% fund management fee, was bound to do well, thought fund managers. A gold ETF sells paper units against its gold reserves.
Pune-based investor Anwar Khan bought ETF in Benchmark’s public offering. Three months after the launch, Benchmark’s gold ETF’s per unit value has fallen to Rs880 from Rs959—the price at which the units were listed. The per unit value of UTI Asset Management’s gold ETF, launched around the same time, has dropped to Rs875 from Rs944. Undeterred, Khan says he does not look at the price of his ETF. He does not intend to touch ETF for at least three years. “Whatever happens, gold will always be gold,” he says.
Not all investors share his enthusiasm on the yellow metal. This is because when Indians buy gold, they want gold, not paper, fund managers say. For Indians, used to actually stashing away gold and gold jewellery as a form of savings, “this concept of holding paper gold will take time to become popular,” says Ritesh Jain, head of fixed income at Kotak Asset Management Company Ltd. Kotak is the third asset management firm in the country to launch a gold ETF. It will remain open till 4 July and will get listed in August. At least two more mutual funds have applied for regulatory approvals to start gold ETFs, including Escorts Asset Management.
But Khan says that ETFs are probably the safest way to invest in gold. “You may not be able to get 30% returns, but this is the first opportunity to invest in gold without the hassles of storing it in the locker or the house,” he adds.
Benchmark’s gold ETFs were launched in March, four years after the world’s first gold ETF was traded on the Australian Stock Exchange. These funds buy gold and issue certificates with the security of that gold. Globally, gold ETFs have grown to become a $12.37 billion (Rs50,717 crore) industry.
The market in India is made up of retail investors and high net-worth individuals (HNIs). UTI Asset management is working with wealth managers to encourage HNIs to buy gold as a part of their portfolio. R. Raja of UTI Asset Management says that people who invest in gold might be emotionally pressured into not selling because of the lure of the precious metal. With gold ETFs, he adds, they will “not have such emotions or endowment bias” and will “treat it like any other investment.” Kotak’s Jain finds investment in gold as a hedge as gold usually performs inversely to equity and hence “people can keep it to balance their portfolios”.
Indeed, Rajendra Patel, a Mumbai-based mutual fund distributor, invested in Benchmark’s gold ETF to diversify his portfolio. “You never know which asset class will do well,” he says.
After Benchmark raised Rs125 crore in its public offering and UTI raised Rs145 crore, both ETFs have been hit not only by the entrenched attitudes that favour holding physical gold, but also the appreciation of the rupee which has made buying gold in the international market more expensive.
But Kartik Jhaveri, a Mumbai-based financial planner, tells potential investors to not get enamoured by gold ETFs just because they are new. “Investing in gold or gold ETFs is a very conservative strategy because returns on gold will be around what inflation is,” he says. Jhaveri says he does not see gold having the sort of bull run it had in 2005-06 when prices went up around 50%.
Fund managers say that while current exchange rate may not favour investing in gold, they have seen interest in ETFs from long-term retail investors. Benchmark now has 25,000 investors from 13,000 when it started. In some ways, the concept of gold ETFs is not alien. Khan of Pune says he has bought his ETFs for his daughters and prefers to invest in these than jewellery.