There are many factors contributing to the growing preference of investors towards Gold ETFs over physical gold. The most prominent being escalating geopolitical tensions which have solidified gold’s status as a ‘safe-haven’ asset. Read to know more.
Many Indians look forward to ‘Dhanteras’ which is a revered festive occasion wherein people actively make new purchases, especially of gold or silver items. As this festival approaches, investors are increasingly opting to invest in Gold Exchange Traded Funds (ETFs), which have witnessed a significant surge in popularity over the last few years.
According to a recent report by ICRA Analytics, the Assets Under Management (AUM) for Gold ETFs have seen more than seven-fold growth in the last five years, rising from Rs 5,613.22 crore in September 2019 to Rs 39,823.50 crore in September 2024.
However, what is driving this preference for Gold ETF when traditionally Indians have believed in purchasing gold to build their assets?
The analysis shows that there has been an 88 per cent rise since the beginning of 2024, the inflows here have surged from Rs 657.46 crore in January to Rs 1,232.99 crore by September. Such an increase is a reflection of investor’s changing preferences from purchasing physical gold to putting their money into digital financial instruments such as the Gold ETF. The trend is especially visible during the festive season when investors actively look forward to gold purchases.
There are many factors behind this growing interest of investors in Gold ETFs over the traditional purchase of physical gold. The report noted that geopolitical tensions have been escalating globally such as the Israel-Palestine Crisis, Ukraine-Russia War, etc. which have solidified gold’s status as a ‘safe-haven’ asset, making it an attractive choice for investors.
Moreover, Gold ETFs offer a key advantage over physical gold by removing the challenges associated with storage, purity concerns, and the risk of ‘theft’.
Ashwini Kumar, senior vice president and head of market data at ICRA Analytics says, “Investors favour investing in Gold ETFs due to liquidity, transparency, cost-effectiveness, and ease of trading compared to physical gold. The heightened activity in these funds is also driven by the prospects of an interest rate cut by the U.S. Federal Reserve in the coming months.”
What Does The Data Say?
This shift in investor choices is visible if you look at the five-year comparison where inflows have increased by 2,695 per cent. Gold ETFs’ investment rose from Rs 44.11 crore in September 2019 to Rs 1,232.99 crore in September this year. The data from ICRA Analytics noted this spike as a growing appeal of Gold ETFs due to their liquidity, transparency, and alignment with global gold prices.
The report shows that Gold ETFs gave competitive returns adding to their appeal. Among the 17 Gols ETF schemes available in the market, the average one-year return is 29.12 per cent, with three-year and five-year returns of 16.93 per cent and 13.59 per cent, respectively. For instance, LIC MF Gold ETF delivered the highest returns across one-year, three-year, and five-year periods at 29.97 per cent, 17.47 per cent, and 13.87 per cent respectively.
Although, physical gold has offered a slightly higher average return of 30.13 per cent over one year, 18.03 per cent over three years, and 14.88 per cent over five years. The added security and convenience of Gold ETFs including the strict regulations and trading in real-time is attracting many investors towards these digital gold investments.
Given that India is the world’s second-largest gold consumer after China, demand for gold traditionally peaks during the festive season, particularly around the occasions of Dhanteras and Diwali. Moreover, there’s an additional icing on the cake this festive season. The government, in Budget 2024-25, reduced import duties on gold raising expectations for strong demand. However high gold prices continue to remain a concern as they could impact the spending power of some buyers during this period.
Still, the report by ICRA emphasises that risks associated with purchasing physical gold, such as storage challenges, the potential for theft, and concerns over purity are pushing investors toward Gold ETFs. These digital gold investments offer a convenient and secure alternative, making them a preferred choice for those looking to capitalise on the festive buying trend without the headaches of physical possession.
The data suggests that Gold ETFs could be a prudent choice for investors looking to invest keeping in mind the short to medium-term horizon. The ‘buy on dips’ strategy might benefit investors, allowing them to take advantage of temporary corrections in gold prices.
“Given the current market dynamics where equities are showing mixed trends, a modest allocation to gold may serve as a hedge against inflation and market volatility which may help balance risks in an optimum manner,” Kumar states.
With Dhanteras around the corner, the market may witness traditional buying converging with modern investment tools. Gold purchase has been a preferred traditional approach for many Indians, however, the shift towards digital gold, particularly the rising interest in Gold ETFs, shows investor sentiment changing towards more flexible and secure avenues of investing in gold.