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The Rise Of Gold Funds

We look at the many reasons why gold ETFs have gained popularity among Indian investors…

Gold Exchange Traded Funds (ETFs) are a fairly new phenomenon in India with the first one being launched four years ago. In February 2007, Gold Benchmark ETF raised Rs 96.26 crore. Today, its average assets under management (AUM) stands at Rs 1703.49 crore as on March 31, 2011.

It is the arrival of commodity exchanges, Gold ETFs and gold stock funds that has made it trivially easy to invest in gold without having to worry about purity, storage and security. Just as important is the fact that these have made gold easily comparable to other investments. When an investor looks at fund performance data on ValueResearchOnline.com, he can’t help comparing the returns of gold-based investments with equity-based ones. No longer is investing in gold an out-of-sight and out-of-mind phenomena. It is convenient and accessible and has a simplicity in decision making (not hundreds of funds to choose from).

Since February 2007, Gold ETFs in India raised around Rs 941 crore in their respective new fund offers (NFOs). As on May 31, 2011, their current assets total at more than Rs 5,463 crore! Interestingly, most of the money has entered over the past one year. In FY 2010-11, net inflows into Gold ETFs have been around Rs 2,250 crore. The number of retail folios in Gold ETFs have doubled over the last financial year.

Unfortunately, investments in any ETF require the investor to own a demat account since the units are listed on the stock exchange. That apart, mutual fund companies were not able to leverage their key strength, their agent and distribution network. To circumvent this issue, fund houses came out with open-end schemes that would invest in their own Gold ETFs, thus doing away the need for a demat account. While three such schemes already exist, HDFC Mutual Fund, SBI Mutual Fund, Axis Mutual Fund and Religare Mutual Funds have filed their respective scheme information documents with the Securities and Exchange Board of India (SEBI) for similar schemes.

Besides this, investors’ appetite for gold funds is also visible in the new hybrids funds which allocate nearly a third of their assets to gold. Take, for instance, Canara Robeco InDiGo which invested 31 per cent, and Axis Triple Advantage which invested 25.32 per cent, of its total assets in Gold ETFs (as on April 30, 2011). Seven such funds (excluding Sundaram Equity Plus) together raised nearly Rs 831 crore for the gold flavour and their current assets stand at Rs 1,679 crore.

Not surprisingly, gold funds also lead the pack of international funds. Two gold funds -- DSP BlackRock World Gold Fund and AIG World Gold Fund which invest in gold mining companies across the globe and Gold ETFs globally, account for nearly 42 per cent of the total money invested abroad through mutual funds.