Experts decode strategy in Gold ETF investments, as this MF category sees month-on-month decline in net inflows

Gold ETF Mutual Funds have witnessed a month-on-month decline in net inflows during the April-June quarter. In June net inflows amounted to Rs 134 cr, which were a further drop from May (Rs 203.39 cr) and April (Rs 1100 cr) according to data released by AMFI.

AMFI is Association of Mutual Funds in India and it release monthly report on Mutual funds.

Roopali Prabhu, Chief Investment Officer (CIO) and Co-head of Products & Solutions at Sanctum Wealth sees this sharp inflow in April as an aberration compared to 2021 average monthly inflows of Rs 400 cr in in gold ETFs. "We are now seeing flows (getting) normalised," she said.

In January and February 2022 witnessed net outflows.

The Russia-Ukraine war which broke out in April, and this coupled with inflation, unsettled the equity markets and spiked significant inflows into Gold which is seen as a hedge against geopolitical risk, volatility and inflation, Prabhu said.

Meanwhile, another expert Pritam Patnaik said that the trend witnessed in domestic ETF has mirrored the global trends. He is Commodities Head, HNI & NRI Acquisitions at Axis Securities.

"At the start of this calendar year, the total holding in SPDR Gold fund was around 975 MT, with gold prices around USD 1805. The holdings peaked to close to 1104 MT around mid of April, with Gold trading at around USD 1976, post which, we did see a sequential decline in prices and holdings, but the prices corrected faster than the drop in ETF withdrawals," he said.

“With gold trading between USD 1705 and USD 1710, the ETF holdings in SPDR Gold Fund are around 1009 MT”, Patnaik said, adding that this indicated that the investor community now largely believes that the yellow metal is trading near its bottom.

He did not rule out further correction but was optimistic about the price bouncing back in due course.

"They will be taking cues from historical rate hike scenarios, where Gold initially corrected with every rate hike to only rise significantly, once the rate hike cycles stop. We expect the outflows to continue, albeit the pace of withdrawal will reduce significantly, and stop in the coming months," Patnaik said.

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Outlook for GOLD ETFs

"While gold prices haven’t moved much, they have protected portfolios as the rest of the market (both equities and bonds) have corrected over the last few months. With equity markets stabilising we expect money to move into equities causing gold flows to diminish further," Prabhu said.

"They will be taking cues from historical rate hike scenarios, where Gold initially corrected with every rate hike to only rise significantly, once the rate hike cycles stop. We expect the outflows to continue, albeit the pace of withdrawal will reduce significantly, and stop in the coming months," Patnaik said.

Expert Advice on Gold ETFs

Gold is less correlated with equity and debt and also tends to act as a hedge against uncertainty, Prabhu said. Her advice to investors is to have some exposure in gold notwithstanding their aggressive risk profile.

"While we expect both equity and debt markets to do well over the long term, we expect volatility to continue in the coming few months as central banks hike interest rates, global liquidity is sucked out and geopolitical uncertainty persists. Additionally, US dollar strength has weighed against gold over the last few months. As the dollar stabilizes we could see gold prices move higher. Hence, we suggest investors to remain invested in gold," she further said.

Reiterating Prabhu’s assertions, Patnaik suggested holding on to gold investments said that if liquidity was not an issue with the investors.

“Considering that the precious metal has already corrected significantly, we could soon see some value buying once the aggressive rate hike cycles are behind us. Moreover, Gold as an investment is always for the long term, as time evens out any price aberrations owing to geopolitical events, eventually enabling gold to deliver returns that beat inflation,” the Axis Securities expert said.

(Disclaimer: The views/suggestions/advises expressed here in this article is solely by investment experts. Zee Business suggests its readers to consult with their investment advisers before making any financial decision.)