How the recent customs duty hike affects gold funds
- Experts say gold is a long-term asset, and investors should not worry about short-term fluctuations
Last week, the government increased customs duty on gold from 10.75% to 15% to curtail imports of the precious metal. This was done with a view to reduce the pressure on the widening current account deficit (CAD), which, in turn, had aided the depreciation of the rupee.
Subsequently, prices of gold that were range-bound until Friday suddenly saw a spike. On Tuesday, gold prices on the MCX hit an over two-month high of ₹52,261 per 10 grams.
There has been a similar impact on gold exchange-traded funds (ETFs) as well. Data from Valueresearchonline.com show that gold funds had been the best performing category with a return of 2.5% last week.
The net asset value (NAV) of a gold ETF is calculated based on the rupee value of a gram of gold after factoring in the import duty and other costs. And, experts say a duty hike of around 5% should have resulted in a corresponding increase in gold prices.
“If you were to calculate gold prices, taking international prices into account and adding the duties, the commodity is trading at about 2% lower than what its rate should have been in the physical wholesale market,” said Chirag Mehta, chief investment officer at Quantum Asset Management Company.
Mehta said that the complete pass-through of duty hasn’t happened because of the weak demand in the physical market at present.
From an asset-allocation standpoint, it is advisable to have some allocation to gold—about 5-10%—for diversification benefits given the metal’s low correlation with other asset classes and safe-haven demand in times of global risk-off sentiment.
Domestic gold funds have delivered around 8-9% (direct plans) over the last year. The bulk of this return is owing to the depreciation of the rupee, around 5.5%, against the US dollar and the recently imposed import duty.
Dhaval Kapadia, director–managed portfolios, Morningstar Investment Adviser India, said that, going ahead, gold’s performance is likely to be subdued given the aggressive interest rate tightening by central banks to tame inflation. June was volatile for most asset classes. International gold prices fell by 1.6% on a monthly basis to close at $1,807.
“Gold may find some support owing to safe-haven demand amid concerns over slowing global growth and any escalation in the Russia-Ukraine crisis,” said Kapadia.
However, Mehta said that there is a likelihood of the global economy witnessing above-average inflation and below-average growth for several years.
“This stagflationary environment, if it materializes, will have destabilizing consequences for the global economy and markets, supporting the investment demand for gold,” he said.
As for its past performance, on a three and five-year basis, gold funds in India have on average gained 14.08% and 11.97%, respectively. These funds have even beaten the large-cap fund category over the same period.
According to experts, since gold is a long-term asset, investors should not worry about short-term fluctuations.
“Many may fear that gold prices will increase due to the import duty hike and hence hold their funds till prices plunge. But I would suggest ignoring the market timing and making investments keeping long-term benefits in mind,” said Priya Agarwal, Money Coach at LXME, a financial platform for women.
But any exposure to gold should only be done in a staggered manner over time.
Also, investors shouldn’t ignore the risks. “A subsequent lowering of the import duty based on economic conditions prevailing in the future could pull down prices accordingly,” said Kapadia.
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First Published:6 Jul 2022, 06:25 AM IST
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