The Hindu Business Line : `We expect a 20 per cent return from gold over 5-10 years'

With the increasing demand for gold as an alternative investment class, coupled with the declining dollar, increased geo-political tensions in the Middle East and the global inflationary scenario, we expect a 20 per cent return from gold. — MR RITESH JAIN, HEAD (FIXED INCOME), KOTAK MAHINDRA AMC

Despite their insatiable appetite for ornaments, Indian investors have met the first Gold Exchange Traded Funds, which allow you to hold the yellow metal in paper form, with a less-than-enthusiastic response. But this did not deter Kotak Mahindra Mutual Fund from rolling out its own Gold ETF this week. "Investors will take to gold ETFs once they see better performance from this asset class," says Mr Ritesh Jain, Head (Fixed Income), Kotak Mahindra AMC. In this conversation with Business Line, Mr Jain makes a case for owning gold ETFs and sheds light on the investment returns that gold has offered in recent years.

Excerpts from the interview:

Despite the enormous appetite that Indian investors have for physical gold, the two gold ETFs launched so far have received only lukewarm response. In fact, data from the mutual funds body, AMFI, show that the assets managed by Gold ETFs amount only to Rs 240 crore as of end-May. What is the reason for this and does Kotak expect better response to its Gold ETF?

There is no doubt about the appetite of the Indian investors with about 15 per cent of the world's gold being consumed by Indians.

However, the lukewarm response received by the two gold ETFs launched can only be attributed to the ignorance about the exact functioning of the product as well as the inherent attachment of the Indian investors of having the feel of physical gold.

This is to some extent justified, as a large amount of the gold that is bought is consumed as ornaments or in shape of gold coins, rather than being viewed as an investment avenue.

With reference to the assets managed by Gold ETFs being Rs 240 crore, this is a function of the recent returns. In the last four months, gold has given only a 2 per cent annualised return as compared to equity markets at 31 per cent. Investible money has been ploughed into higher yielding assets such as equities. However, we expect good response for our product as the investors have started to show interest in the gold ETFs. The average daily trading volumes (on the stock exchanges for listed Gold ETFs) has improved from 3000-4000 units to 6000-7000 units currently. Gold ETFs are designed to passively track the prices of gold, as a commodity.

During the past four months (when the two other Gold ETFs have been available) the price of gold has risen to a high of $691 a troy ounce, but has come down to $645-650 levels since. This is a major support level for the price of gold in recent months. It is expected that the gold prices will bounce back from these levels as it has in the past, thereby providing decent returns to the investors.

Though it is a good portfolio diversifier, gold hasn't delivered very good investment returns for long-term investors in recent years. Our analysis shows that the 10-year compounded annual returns on gold is only about 6 per cent, based on domestic prices. In your view, will returns over the next 5-10 years be better?

Gold has been in the past viewed as a hedge against the inflation and thereby the return provided in the last 10 years of 6 per cent takes care of the average inflation of 5 per cent per annum. However, it is only since 2001 that gold has started to be viewed as an investment asset. With the AUMs of the commodity hedge funds and indices increasing at a 30 per cent CAGR, gold has given a CAGR return of 26 per cent in this period. With the increasing demand for gold as an alternative investment class, coupled with the declining dollar, increased geo-political tensions in the Middle East and the global inflationary scenario, we expect around 20 per cent annual returns over the next 5-10 years.

What is Kotak MF's short to medium term view on gold prices in the domestic context?

With the increasing demand for gold as an alternative investment class, as also the reasons stated above, we expect the gold prices to touch $825-875

in the short to medium term

Why should an investor take the ETF route instead of taking a futures position on the commodity exchanges?

For a person who has both an ETF and the derivatives contract as alternatives, we believe it makes sense to invest in the ETF due to the following reasons. One, the price tracked in both the investment options is that of physical gold, thus there is no difference in the underlying asset. Second, for a risk averse investor; investing in futures position in commodity exchanges is much more riskier, as there is a lot of leverage involved. The minimum trading lot for the contract is Rs.10 lakh; thus the price risk is equally large.

Who are the typical target investors for Kotak Gold ETF? What should be their investment horizon?

The target investors for Kotak Gold ETF are:

Institutional investors seeking to diversify their portfolio into other investment class;

Retail investors who have a significant portion of their savings in bank deposits, but because of low interest rates are looking to invest in higher yielding, yet liquid, assets; and

Those who wish to diversify their portfolio across new investment classes and yet want to invest in smaller denominations.

Given that this is a passive product, wouldn't your entry load and management fee make a significant impact on investor returns?

The entry load and management fees do impact investor returns. In this product, they have been kept as low as possible to cover the operational costs.

Would investors in Kotak Gold ETF have good liquidity on their units? Some of the ETFs already listed on the bourses do not register large trading volumes...

To provide liquidity on units, the authorised participants will provide continuous two-way quotes on which the investors can either buy/sell the units of the ETF. Though, the trading volumes have been low, there has been an increase in investor interest with volumes picking up over the last one month.

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