Gold exchange-traded funds (ETFs), launched more than a year back to cash in on the nation’s craving for the yellow metal with the convenience of a mutual fund, have not so far seen the kind of demand the market was expecting for.
Gold ETFs have seen only a total investment of Rs480 crore in 3.4 tonnes of gold during the whole of the fiscal year that ended on 31 March. That compared with a daily turnover of around Rs 6,000 crore in the gold futures market, where traders enter into contracts to sell the commodity at a future date at a specified price. The spot market, where the deliveries are immediate, for the metal also saw much larger volumes compared with ETF investments.
But, industry experts expect it to change as they say the demand for gold ETF schemes would catch up as people become more familiar with this instrument. Gold ETF is in its nascent stage in the country and will take some time to pick up, said AP Kurian, chairman of the Association of Mutual Funds of India, while admitting that the movement in gold ETF has been slow compared with the futures and spot markets.
Benchmark Mutual Fund launched India’s first gold ETF on 15 February 2007. It was followed by UTI Mutual Fund’s gold scheme on 1 March that year. Gold ETFs are mutual fund schemes that invest money collected from investors in standard gold bullion that are denoted in units and listed on the exchanges. The ownership is electronically recorded in dematerialised form and there is no risk or problems normally associated with physical storage of gold.
Kurian said as in countries such as Australia, the US and South Africa, where gold ETFs are highly successful, the demand will pick up here as well. Given the assured returns that are not affected by the volatility in the stock market, gold ETFs are sure to pick up, Kurian added.
PR Dilip, managing director of Impetus Wealth Management Ltd, says that in a gold savy country such as India, which is believed to have an intake of 750 tonnes of gold in 2007, gold ETF schemes were yet to reach comfortable levels even a year after they were launched. “However, ETF being cost effective and also since gold was the best bet for investment, it will only be a matter of time before the concept catches up in the country,” he said.
The demand in the futures market is driven by speculation, he added.
However, Jayant Manglik, head of commodities at brokerage firm Religare Commodities Ltd, feels the ETF schemes are ideal for the small investor, but there is not enough trading liquidity. It is an issue for small investors wanting to exit, especially during a time of crisis, Manglik added.
On the contrary, investors and the trade have been looking at the futures market despite having to pay a margin of 5% of every investment, he said. Manglik points to the rising interest in gold futures despite the metal’s high price, which was Rs11,780 per 10gm on Tuesday, following the rising crude oil prices.
Average daily gold volume in the futures market, which was worth around Rs3,800 crore in 2005, went up to Rs4,500 the next year and have been around Rs6,000 crore now. Samir Shah, vice-president of RiddiSiddhi Bullions Ltd, which launched its first electronic spot exchange for gold in March, says over the month, the volumes in his exchange have risen to more than double of the ETF market.
The company has been in the bullion trading business for over 25 years with an annual sales of Rs 5,900 crore. An authorized participant in all gold ETFs and a delivery provider for the futures exchanges in the country, the company launched its spot exchange to cater to the needs of jewelers and traders in the country, he says.
RiddiSiddhi has over 150 clients at present and in the one month since its launch, the exchange has seen total deliveries of over 450kg. The company which is now concentrating in Mumbai, is to soon expand its operations to Ahmedabad and Hyderabad, Shah added.