Gold ETFs turning unattractive? Investors pull out whopping Rs 773 cr in FY18 so far

Investors pulled out Rs 94 crore from gold exchange-traded funds (ETFs) in February, taking the total outflows to Rs 773 crore in the first 11 months of 2017-18 mainly due to poor returns and volatility in prices. However, experts believe next financial year can be slightly better for gold ETFs as ongoing uncertainty in the global market might increase the demand for the precious metal.

According to the Association of Mutual Funds in India (Amfi) data, a net sum of Rs 94 crore was pulled out from 14 gold-linked ETFs in February, as compared to an outflow of Rs 46 crore in the same month in 2016-17.

In January, a net amount of Rs 110 crore was withdrawn from the instrument.

With the latest outflow, the total pullout has reached to Rs 773 crore in the April-February period of the ongoing fiscal.

Groww COO Harsh Jain attributed the latest outflow to increase in volatility and poor returns. Also, gold bonds, with an additional interest of 2.75 per cent, makes them better instrument than the ETFs.

He said the next fiscal can be slightly better for gold ETFs as ongoing uncertainty in the global market might increase the demand for the yellow metal.

"But in long term, the growing popularity of Bitcoin and other crypto-currencies can be a threat to the gold as an asset class," he added.

Trading in gold exchange-traded funds (ETFs) had been lukewarm in the previous four fiscals. It witnessed an outflow of Rs 775 crore in 2016-17, Rs 903 crore in 2015-16, Rs 1,475 crore in 2014-15 and Rs 2,293 crore in 2013-14.

The outflow meant assets under management (AUM) of gold funds plunged by over 16 per cent to Rs 4,830 crore at the end of February this year, from Rs 5,766 crore in the year-ago period.

On the other hand, equity and equity-linked savings scheme (ELSS) saw an infusion of Rs 1.64 lakh crore during the first 11 months of 2017-18. This included an investment of over Rs 16,000 crore in the last month alone.

"Barring couple of months, India has seen net negative flows in gold ETFs from February 2013. Even in terms of inflows, from triple-digit crore of inflows until 2012, it has now dwindled to low single-digit and almost nil in some months. 
Domestic gold's 3-year annualised returns at less than 3 per cent is lower than even savings bank rate today,? said Vidya Bala, head of mutual fund research at Fundsindia.Com.

"The sell-off in gold is in line with poor sentiments for gold world-wide. This comes on the back of stronger fundamentals in global economies, especially in the US. Expectation of faster rate hike in the US means that bonds yields will be expected to be more attractive than gold. Thus, the current sentiments do not bode well for gold as an asset class, she added.

Gold ETFs are passive investment instruments that are based on price movements of the metal.