Gold ETFs attract ₹446-cr in September; inflow may continue in coming months on festive season demand

Gold exchange-traded funds’ latest inflow has helped in pushing the number of folios in the category by over 14% to 24.6 lakh in September from 21.46 lakh in the preceding month

Gold exchange-traded funds (ETFs) attracted ₹446 crore in September and inflow may continue in coming months due to strong demand on the back of festival season in the country.

The demand was sharply higher than the net inflow of ₹24 crore recorded in the previous month. In July, the category saw a net withdrawal of ₹61.5 crore, data with the Association of Mutual Funds in India (Amfi) showed.

With this, gold ETF category has received a net inflow of ₹3,515 crore so far. The segment witnessed just one month of net outflows, which was in July.

The latest inflow helped in pushing the number of folios in the category by over 14% to 24.6 lakh in September from 21.46 lakh in the preceding month. So far this year, the folio numbers have surged by 56%.

Market experts attributed the inflow in September to correction in the price of the yellow metal and onset of the festival season in the country.

"Gold ETFs saw a prominent inflow for the past month. In the thick of a volatile market, resorting to a safe instrument can be one of the reasons for this move, with rising gold prices being the other reason drawing attention to the instrument," Priti Rathi Gupta, Founder of LXME, said.

Arshad Fahoum, Chief Product Officer, Market Pulse, said that the ongoing rally in global equities, coupled with the fierce rally in Indian equities in 2021, could be making investors wary of further rise, which seem to have supported the signs of gold prices bottoming out. "If we look back at the period from July to mid-September, Indian equities rallied strongly; which could have meant investors opting for equity-based and debt funds, which in turn could be a reason for gold ETFs witnessing net outflows in July, mildly positive inflows in August and the huge inflows in September," he said.

Another interesting aspect is the outflows in gold ETFs experienced by the U.S., U.K. and Canada in September 2021, while Indian gold ETFs saw a significant inflow in the month under review. This could also be an indication that the onset of the festival season in India may have assisted the rising gold ETF inflows in September 2021, he added.

Himanshu Srivastava, Associate Director – Manager Research, Morningstar India, said that gold prices have been on a downward trajectory since June this year. Gold is considered as safe haven during economic downturn and when equity markets go through a turbulent phase. "However, rally in equity markets and expectation of economic recovery, has not augured well for gold in the recent times. Also, a stronger dollar and surge in US treasury yields has adversely impacted gold prices," he said.

According to him, correction in the price of yellow metal over the last few months provided a good buying opportunity for investors, which resulted in robust flows into Gold ETF category.

Investments into ETFs that track the yellow metal have been witnessing a steady uptick since August 2019.

However, the asset class witnessed net outflows of ₹141 crore in November 2020, ₹195 crore in February 2020 and ₹61.5 crore in July 2021.

Mr. Srivastava said that gold functions as a strategic asset in an investor’s portfolio, given its ability to act as an effective diversifier, and alleviate losses during tough market conditions and economic downturns. "This is where it draws it’s safe-haven appeal." "During the challenging investment environment in the recent past, gold emerged as one of the better performing asset classes, thus proving its effectiveness in investors’ portfolio," he said.

This aspect has not gone unnoticed by investors, which is evident from rather consistent net inflow into gold ETF category, he added.

Despite the inflow, the assets under management (AUM) of gold ETFs dropped to ₹16,337 crore at the end of September from ₹16,350 crore at August-end. It stood at ₹16,750 crore in July-end.

Going ahead, Market Pulse’s Mr. Fahoum said that the inflows in gold ETFs to remain positive in the upcoming months, primarily because of the momentum in gold prices since the beginning of October 2021 and the strong demand on back of the festival season in India. Secondarily, since the overheated equity markets and increasing inflationary pressure call for diversification, more investors may choose to invest in gold ETFs, he added.

"With festivities approaching, one can expect the upcoming demand of gold investments in one portfolio leading to a higher inflow for the upcoming months," LXME’s Ms. Gupta said. Gold ETFs are basically exchange-traded funds that invest in gold. They are traded on the stock market and make direct investments in gold.

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