Shining bright. Gold ETFs win the heart of Indian investors

Sat Jan 04 2025

Gold exchange-traded funds (ETFs) have emerged as a preferred financial instrument among Indian investors. The overall traded volume in Gold ETFs on the secondary markets (both the BSE and the NSE) more than doubled to ₹26,587 crore in 2024, compared to ₹9,866 crore in 2023.

The volumes have increased along with the increase in the price of gold.

Gold ETFs invest in standard gold bullion, with 99.5 per cent purity. They are passively managed schemes, with their net asset value and traded price on the exchanges being closely linked to the domestic price of gold. The ETFs are available on stock exchanges, and investors need a demat account to buy and sell them.

Gold prices have been on the rise since October 2022 and the metal has delivered a CAGR of 13 per cent over the last five years in rupee terms.

Growing appetite

Expected rate cuts by major economies and persisting geopolitical tensions have led to a significant surge in the price of the metal. Depreciation of the rupee against the dollar and increased purchases by central bank also played a role. Gold has been on a tear in the international markets, returning 29 per cent over the last one year in dollar terms. Uncertainty in inflation outlook amid the rate cutting cycle last year in developed markets has been a factor.

There has also been significant buying in 2024 by global central banks, too — particularly by the central banks of Russia and China attempting to derisk from any potential sanctions. This has set a base for gold as a lucrative investment option, driving the attractiveness of ETFs for retail investors, too.

Gold ETFs score over other instruments such as physical gold, digital gold and sovereign gold bonds (SGBs) in terms of easy access and tradeability close to the fair value of gold. Earlier, there was good participation in gold through SGBs. Currently, no SGB issuance is taking place and most of the series have been trading at a premium in the secondary markets. Meanwhile, most of the gold ETFs are actively traded in the secondary markets and available close to the fair value of the gold.

Secondly, the growing asset base of multi-asset funds (MAFs) that allocate a portion to gold through gold ETFs, too, contributed to the demand. The MAFs category has allocated about ₹6,400 crore to gold ETFs as of November 2024.

Thirdly, gold ETFs have become more appealing after Budget 2024. According to the new tax structure, the gain from the sale of units of gold ETFs will be subject to a capital gain tax of 12.5 per cent, if held for more than a year. Earlier, irrespective of the holding period, gains were taxed at the slab rates.

Positive outlook

Participation has grown among Gen Z and millennials who are investing through various apps and online intermediaries. Per the data available from the AMFI, the total number of investor folios more than doubled in the last three years to 63 lakhs.

Chirag Mehta, CIO, Quantum Mutual Fund, said, “the surge in gold prices is anticipated to persist into 2025, with the trajectory expected to be influenced significantly by the return of US president-elect Donald Trump, which could herald a series of policy changes and strategic decisions.”

Expected rate cuts by major economies and persisting geopolitical tensions could also lead to a significant surge in gold price, he added.

Source: https://www.thehindubusinessline.com/