Why Indians shy away from Gold ETFs?

February 14, 2009

Commodity Online
MUMBAI: World is going after gold exchange traded funds (ETFs) in a big way. But, why Indian investor is not that gung-ho about gold ETFs.

This is a mystery yet to be cracked by experts. Traditionally, Indians love to buy gold and they want to possess it. In fact, they hardly go for ETFs which is just a piece of paper for them.

So, is this traditional mentality affecting gold ETFs in India. It seems so.

According to World Gold Council, investment by ETFs in gold was 150 tonnes in the third quarter (July to September-end). In India, last one year, investment in gold ETFs has risen by a mere Rs 303 crore. In January, gold ETFs collected only Rs 30 crore. At present, the total assets under management (AUM) of gold ETFs stand at Rs 721.65 crore.

Whereas investors have shown interest in gilt funds and put in Rs 11,898 crore since October in it. Gold ETFs attracted only 39 crore in the same period.

There is no dent in profits from ETFs. In fact gold ETFs gave around 19 per cent return in the last year.

In the same time period, the return given by equity diversified funds came down crashing by around 47 per cent. Bombay Stock Exchange’s Sensex crumbled by 45 per cent.

Is it illiteracy which is stopping Indian investors from putting their money in ETFs. Maybe, to a certain extent.

One factor is clear that Indians traditionally love to have gold in their homes rather that possessing a piece of paper about their ownership of gold.
  
Another factor blamed for gold ETFs’ poor show in India is the need for a demat account for investors to buy ETFs.

In India, demat accounts are not very common unless you are living in big cities and you are into equity markets. Except in Gujarat, a state flooded with investors, India’s no other state is much aware of demat accounts and equity market.

Another factor sis that Gold ETF units are bought and sold on stock exchanges like shares. But brokers are not interested in chasing small clients, who buy small quantities every month. And many are not well-versed with this process.

Another major reason is lack of distributor enthusiasm. The mutual fund industry is driven by distributors. And they get commissions for selling every product, except gold schemes. That’s why no one recommends it.

Investment advisors and distributors blame it on lack of investor awareness.

Most financial planners recommend gold ETFs to physical gold. The savings start right from the purchase stage. All sellers, including banks, charge a commission on the actual gold price. This can be 1-5 per cent.

In case of an emergency, the real value of gold cannot be realised. Banks don’t buy back, they only lend against it. Jewellers buy it at a discount. Gold ETFs have none of these problems.

DISMAL SHOW

India, largest consumer of gold in the world, launched the Gold Exchange Traded Funds (ETFs) around two years ago. But, India’s gold ETFs have just over 5 tonnes of gold whereas Indian households own about 15,000 tonnes of gold — around 10 per cent of global stocks of the yellow metal.

The performance of five companies that have launched gold ETFs in the country has been dismal.

Benchmark Mutual Fund launched the first gold ETF in India in March, 2007. At present, there are five players in the market — Benchmark, Kotak, Quantum, Reliance and UTI.

Benchmark holds 2.07 tonnes of gold, UTI has 1.36 tonnes, Reliance Capital 1.49, Kotak 0.36 and Quantum .05.

Though Gold collections under the ETFs are growing year on year, they remain negligible when compared to India’s imports of around 700 tonnes annually.

Although prices in December have been range bound between Rs 12,500 to Rs 13,500 per 10 gm and not very erratic, they have been very fluctuating. A rally has hence been absent for long as prices climb and are soon pulled down by lackluster demand.

The main problem for rapid growth of gold ETFs in India is said to the lack of awareness and complicated investment norms.

As opposed to the Indian scenario of falling ETFs, ETF holdings abroad continue to rise, with investors adding to the pool with 32 tonnes of gold in December.

ETFs track the performance of a particular index; their base price is basically equivalent to the value of the index.

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