Gold exchange traded funds lose sheen on poor returns and gold bonds

The slump in gold prices and the emergence of sovereign gold bonds (SGB) seem to have spelt the death knell for gold exchange traded funds (ETFs). 

Assets of gold ETFs have reduced by more than a third in the last five years to Rs 4,571 crore. Gold ETFs have seen net outflows of Rs 4,701 crore, with net inflows in only two of the past 60 months, data from Association of Mutual Funds in India shows. 

Returns for gold ETF schemes have averaged 2.7 per cent for a five-year period. In comparison, the benchmark Sensex has returned in excess of 70 per cent. 

A strong US dollar and the Federal Reserve’s monetary policy of quantitative normalisation exerted pressure on gold prices in 2018. Investors favoured the dollar and treasuries in lieu of gold as they weighed uncertainties surrounding the impact of a US-China trade war on global growth, according to experts.

With the global economy expected to slow down, the outlook for the yellow metal this year is looking up. “The world continues to remain in a state of great disequilibrium, both with respect to the global economy and the geopolitics. Given this scenario, gold prices should move up gradually and prove to be a useful portfolio diversification tool, thereby helping reduce overall portfolio risk,” said Chirag Mehta, senior fund manager-Alternative Investments, Quantum Mutual Fund. 

The emergence of SGBs as an investment option has also dented flows into gold ETFs. SGBs pay interest of 2.5 per cent per annum, an added benefit to investors that is not available with gold ETFs. Also, no capital gains tax is payable if the sovereign gold bonds are held till maturity, while ETFs held for more than three years attract capital gains tax (with indexation benefits).

Investors have to bear the transaction charges for trading in gold ETFs. SGB investors do not have to pay any transaction charge if they don’t exit through the exchanges. According to a research note put out by HDFC Securities, gold ETFs deduct charges by way of total expense ratio, which can range from 0.58 per cent to 1.18 per cent per annum of the total assets. 

The new series of the SGB scheme was open for subscription between January 14 and January 18. The face value of the bond is Rs 3,214 per gram. If an investor makes an online payment, there’s a Rs 50 discount and they could get each bond for Rs 3,164 a gram. SGBs will also be issued in February.

“SGBs are to be treated as an asset diversification strategy rather than to earn superior returns. Gold prices are prone to fluctuations based on macro events globally and USD-INR rates and doing a SIP in every tranche of gold can be considered by investors who are either underinvested in gold or have regular fresh monies for allocation among various asset classes or need to accumulate gold for wedding or other auspicious occasions,” said HDFC Securities in its note.

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