Gold ETF Assets Jump Four-fold in Just One Year

Launch of new fund offers and rise in yellow metal's value help in fund-raising

The growing acceptance of exchange-traded funds (ETFs) among retail and high networth individuals, launch of new fund offers and a rise in the value of gold have quadrupled assets under management (AUMs) of gold ETFs over the past year. AUMs rose to Rs 4,800 crore as on April 30, 2011, up 180% from a year ago when they were at Rs 1,171 crore even as gold jumped 33% to Rs 22,937 a tola (10 gram) during the same period. 

"Gold has been accepted as an asset class and investing through ETFs is being increasingly viewed as a legitimate way to hold gold in demat form," said Devendra Nevgi, founder and principal partner, Delta Global Partners, a company that provides commodity research to overseas investors. 
Two new gold savings schemes were launched during the period under review -- Reliance Gold Savings Scheme, which mopped up Rs 141 crore, and Kotak Gold Savings Scheme, which attracted inflows of a little over Rs 5 crore. Both these schemes invest into ETFs run by Reliance and Kotal mutual funds and contributed to net inflows into the funds. The gold schemes are in addition to the 10 gold ETFs, including the likes of Benchmark Gold ETF with AUM of Rs 1703.49 crore as on April 30, 2011, UTI Gold ETF (Rs 497.65 crore) and Reliance Gold ETF (Rs 434.38 crore). Gold demand has been boosted by a weak dollar and worsening sovereign debt of some Eurozone members as investors the world over flock to hard assets like bullion to protect themselves from the falling value of paper money. 
"The metal has value as a portfolio hedge and ETFs add to the convenience of holding gold in demat form for existing equity market holders," said Suresh Nair, director, Admisi Commodities. "However, a fall in gold can expose investors to big losses. However, being long-only ETFs, an investor with a view that gold prices could fall can't short-sell gold ETFs here. I think commodity futures market scores over ETFs by allowing an investor to short-sell by paying a small margin," added the broker. 
The disadvantage of a gold ETF is the tracking error, where the fund's net asset value might not accurately reflect the movement of the underlying asset. The tracking error arises out of cash held by ETF and expenses charged on managing the fund. Net inflows into the ETFs almost trebled to Rs 919 crore during January- April from a year ago, according to Association of Mutual Funds of India. Average gold price in Mumbai rose by 25% to Rs 20,937 a tola over the comparative period, exceeding returns from the Sensex,which generated a negative 11%, and fixed deposits of 9-9.5% by miles.