Dazzling returns whet investors' appetite for gold

Indians have an affinity for gold jewellery — that is well known. But, recent data suggest they are taking gold seriously as an investment, too.

In 2010-11, gold exchange traded funds, which allow investors to buy units that represent physical gold, saw net inflows of Rs 2,250 crore, which is a three-fold increase over the previous year. Gold holdings of these funds stood at 16.35 tonnes by the end of March 2011, up from 8.24 tonnes a year ago. Gold ETFs also saw record volumes during the recent Akshaya Tritiya.

Fund houses too seem to have sensed the opportunity in gold, as a new asset class for investors looking to diversify.

Three new gold ETF schemes (from HDFC, ICICI Prudential and Axis Mutual Funds) made a debut in 2010-11, taking the total number of such funds to 10. It is not just high-net worth clients who are buying gold ETFs but also many retail investors, says Mr Rajmohan Krishnan, Senior Vice-President, Kotak Wealth Management.

Another indication of the ‘investor' appetite comes from the good sales reported by banks that vend gold in the coin and bar form. Indian investors have bought gold bars and coins to the extent of 160 tonnes in the nine months ended December-2010 (against 148 tonnes in the same period last year). Factors such as high inflation and commodity prices, apart from the impressive returns delivered by the metal in the past three years, seem to be driving investor interest in gold.

Gold's attraction

Internationally, gold prices appreciated 29 per cent in 2010-11. In rupee terms, this comes to a slightly lower 27 per cent. The Indian equity benchmark index Sensex, however, gave a return of less than 10 per cent in this period.

Previously, gold consumption in India was mainly driven by the metal's ornamental value and in periods where gold prices rallied, consumption used to drop. But now, the scenario has changed – consumption is rising even as gold prices rule at record highs. In 2010-11, for instance, gold prices in rupee terms, were 27 per cent higher than last year; yet, India's gold demand rose by over 20 per cent in volume terms.

New investment options

Market participants feel that investors are looking to diversify into alternative asset classes from equities, and gold is just one of the choices.

“After the recent interest rate hikes, many equity investors redeemed their (equity) investments to put in fixed maturity plans and bank fixed deposits where the yield is attractive,” said Mr Amar Ranu, Senior Manager, Third Party Products Research, Wealth Management, Motilal Oswal Securities.

Real estate funds and private equity funds that pool money to invest in start-up companies are also attracting funds. However, it is not conviction alone that is pulling investors towards these funds, says Mr Sandip Sabharwal, CEO-Portfolio Management Services, Prabhudas Lilladher. “Post the elimination of upfront commissions on mutual funds, various wealth managers and distributors have been looking for products that can boost their immediate revenues and real estate and PE funds are offering that…”

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