Why retail investors are flocking to gold ETFs

Indian retail investors are betting big on gold exchange-traded funds (ETFs).

At a time when domestic mutual funds find it difficult to keep retail investors in equity schemes, rising retail participation in gold ETFs has brought it some relief.

Though the historically high prices have hit jewellery retail sales, as buyers anticipate an imminent correction from current levels, the steep rally seems to have not deterred investors getting into gold ETFs.

During April-July, the investor-base in gold ETFs expanded 24 per cent.

More, in just these four months, the industry mobilised more than half of what it gathered in all of 2010-11.

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Further, in terms of net inflow, 2011-12 saw 4.5 times more flows in the initial months than what was seen in the previous corresponding period.

"Investors from all over the country are putting money in gold ETFs and not only from the top 10 cities," says a fund manager who manages gold ETFs.

He did not wish to be named, due to compliance issues.

"Keeping physical gold is neither easy nor  beneficial. However, it's easy for investors to have gold ETFs. Financial planners, too, are advising customers to invest in gold ETFs rather than equity schemes."

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Dhruva Chatterji, senior research analyst at fund tracker MorningStar India, says, "Gold has been the best performing asset class in the past few years, which offered double-digit returns.

Investors' rising interest in gold ETFs is purely performance-driven, amid volatile equity markets and range-bound returns in debt markets."

In April-July, gold prices appreciated 12.15 per cent from Rs 20,775 to Rs 23,300 per 10g.

During the same period, the domestic benchmark indices gave a negative return of six per cent.

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Recently, gold prices have jumped to a new high, after disappointing US economic growth in the second quarter of 2011, followed by the first US government credit downgrade in seven decades, by Standard & Poor's.

The yellow metal's rally to new highs signalled market worries over uncertainties.

"Retail investors are aware of the fear factors circulating in global markets. Problems related with the dollar and the higher inflationary scenario has made gold the only safe investment haven," says the executive director of a fund house.

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This is clearly evident from the sharp surge in the current month in prices amid crashing equity markets.

So far in August, gold has rallied more than what it did in April-July.

It closed 15 per cent per cent higher at Rs 26,790 per 10g on Thursday, as compared with Rs 23,300 per 10g on July 30. The period saw benchmark equity indices crash by 9.5 per cent.

However, there is a word of caution, too. According to Chatterji, investors should not see gold as a high-return asset class but as a stable investment option.

"Investors need to be careful and not build expectations of double-digit return on the basis of the recent trend," he says.