As India approaches the festive season of Dhanteras, traditionally known for gold purchases, investor interest in Gold Exchange Traded Funds (ETFs) has seen a significant surge, according to a recent report by the Investment Information and Credit Rating Agency (ICRA). The report highlights an 88% rise in Gold ETF inflows in 2024, marking a notable shift in investor behavior toward this safer and more transparent form of gold investment.
Gold ETF Inflows See Dramatic Increase in 2024
The ICRA report reveals that Gold ETFs have witnessed a sharp 88% increase in inflows on a year-to-date (YTD) basis, reaching ₹1,232.99 crore as of September 2024. This is a significant rise from the ₹657.46 crore recorded in January of the same year. The report also points out a broader trend of increasing investor interest in Gold ETFs, particularly in the run-up to Dhanteras, a time when gold purchases typically surge in India.
Gold ETFs have become a favored investment vehicle for many, given their liquidity, transparency, and alignment with global gold prices. Over the last five years, the assets under management (AUM) of Gold ETFs have risen dramatically, growing over sevenfold from ₹5,613.22 crore in September 2019 to ₹39,823.50 crore in September 2024, according to ICRA.
Why Gold ETFs Are Gaining Popularity
Ashwini Kumar, Senior Vice President and Head of Market Data at ICRA Analytics, attributes the growing popularity of Gold ETFs to several factors, including liquidity, transparency, cost-effectiveness, and ease of trading compared to physical gold. “Investors favor Gold ETFs due to their liquidity, transparency, and the fact that they eliminate the risks associated with storing physical gold. They also provide real-time trading and price alignment with global markets, making them a more efficient way to invest in gold,” Kumar said.
The anticipation of a potential interest rate cut by the U.S. Federal Reserve in the coming months has also boosted interest in Gold ETFs. Lower interest rates often lead to a rise in gold prices as the opportunity cost of holding non-yielding assets like gold diminishes, making Gold ETFs a more attractive investment.
Geopolitical Tensions and Gold’s ‘Safe Haven’ Appeal
Another factor driving the surge in Gold ETF inflows is the rising geopolitical tensions across the globe. Gold is widely regarded as a “safe haven” asset, and investors typically turn to gold during times of uncertainty to preserve their wealth. “The escalating geopolitical tensions have boosted the ‘safe-haven’ appeal of gold, and many investors are opting for Gold ETFs over physical gold,” Kumar explained.
While gold remains a prized asset for Indian households, physical gold carries inherent risks, including concerns over purity, theft, and the hassle of storage. Gold ETFs, on the other hand, offer a secure and regulated way to invest in the precious metal without these complications. This added layer of security is making Gold ETFs an increasingly popular choice among investors.
Festive Season Boost for Gold ETFs
India, the second-largest gold consumer in the world after China, typically sees a surge in gold purchases during the festive season. Dhanteras, in particular, is a day considered auspicious for buying gold, and the festival often leads to increased demand for the metal. However, with the rise of Gold ETFs, more investors are choosing to invest in paper gold rather than physical gold.
The government’s decision to cut import duties on gold in July 2024 was expected to further boost gold demand during the festive season. However, high gold prices could dampen this enthusiasm, as they might limit the spending power of many buyers. Despite this, Gold ETFs are likely to continue attracting investors due to the advantages they offer over physical gold.
Attractive Returns on Gold ETFs
Another compelling reason for the growing interest in Gold ETFs is the strong returns these funds have delivered. According to the ICRA report, there are currently 17 Gold ETF schemes in the Indian market, and their performance has been impressive. The average one-year return for these funds stood at 29.12%, while the three-year and five-year returns were 16.93% and 13.59%, respectively.
These returns are not only attractive in absolute terms but also stand out when compared to the performance of other asset classes, particularly in a year marked by economic uncertainties and market volatility. The robust performance of Gold ETFs has reinforced their appeal as a reliable investment option for those looking to hedge against inflation and economic instability.
Gold ETFs vs. Physical Gold: A Safer Bet
While physical gold has long been a symbol of wealth and security in Indian culture, it comes with its own set of challenges. Storing physical gold can be risky, and concerns about theft, impurities, and liquidity often make it a less convenient investment. In contrast, Gold ETFs offer a safer and more flexible way to invest in gold.
Gold ETFs are tightly regulated and traded on stock exchanges, providing investors with real-time price updates and the ability to buy or sell their holdings with ease. This level of transparency and convenience is not available with physical gold, making ETFs a preferred choice for a growing number of investors.
Moreover, the costs associated with buying and storing physical gold can be high, particularly when factoring in charges for storage, insurance, and purity checks. Gold ETFs, by comparison, are more cost-effective, as they do not involve any storage or insurance costs, and the expenses related to trading and managing the funds are relatively low.
Conclusion: Gold ETFs Shine in 2024
As India gears up for the festive season, Gold ETFs are clearly emerging as a favored investment vehicle for both seasoned investors and those new to the market. The combination of strong returns, liquidity, and safety, coupled with the rising appeal of gold as a “safe haven” asset in times of geopolitical tension, has driven a sharp increase in Gold ETF inflows.
While physical gold will always have its place in Indian households, the growing popularity of Gold ETFs reflects a broader shift in investor behavior. With their ease of trading, transparency, and alignment with global gold prices, these funds offer a modern and efficient way to invest in the precious metal. As the festive season approaches, and with expectations of further market volatility, the trend toward Gold ETFs is likely to continue, making them a key asset class to watch in 2024.
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