Indians have an insatiable appetite for gold, but when it comes to investing in Gold Exchange Traded Funds (ETFs), it seems there's a complete apathy. No wonder then the Assets Under Management (AUM) of Gold ETFs have been struggling to rise at a time when the overall AUM of the mutual fund industry has hit an all-time high. Over last 1 year, AUM of gold ETFs has increased by approximately 9.1% whereas the mutual fund industry has grown by about 15.2%.
 

Are gold ETFs losing shine?

(Source: AMFI, PersonalFN Research)  

The month-on-month trend in the AUM of gold ETFs suggests that investors have followed a trader's approach while taking exposure to the precious yellow metal in paper form. They have not only been looking at the gold price movements, but at the movement of stock market indices as well. At the beginning of the Calendar Year (CY) 2016 gold had dropped considerably. Spike-up one may see in the above graph in February suggests that investors accumulated units of gold ETFs. During the same time period, equity markets were shaky. On the other hand, in July, stock markets were high and gold prices somewhat saturated after jumping more than 25% from the beginning of CY 2016. As a result, gold ETFs witnessed massive outflows of Rs 183 crore.

Sovereign Gold Bonds are getting popular…

The other factor that played a significant role in restricting the growth in AUM of gold ETFs was the growing popularity of Sovereign Gold Bonds. They offer an interest of 2.75% p.a., as well as provide an exemption from capital gains tax (if held until maturity). Ever since the tax laws have taken away the favourable tax treatment available to the gold ETFs earlier, the popularity of gold ETFs has fallen considerably. Previously, if you held units of gold ETF for more than a year, you were allowed to claim the indexation benefit for the calculation of long-term capital gains. The indexation benefit lets investors adjust their actual acquisition cost of units for the effects of inflation. As a result, taxable gains come lower than the actual profits. One who holds the gold in physical form had to wait 3 years to be able to claim the indexation benefits. Now even investors of gold ETF have to keep their units for more than 3 years for claiming the indexation benefits. The treatment to Sovereign Gold Bonds is similar but the exemption from tax when investors hold on to the bonds till maturity makes them more attractive compared to gold ETFs.

 

PersonalFN is of the view that, you may choose any option between the sovereign gold bonds and gold ETFs. However, you should refrain from following the gold price movement. PersonalFN believes your exposure to gold should be in the range of 10%-15% of your portfolio. Rather than following the trader's approach, focus on your personalised asset allocation that aims to help you build an investment portfolio for the fulfilment of your financial goals.

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