Gold saving funds and gold exchange traded funds (ETFs) witnessed net inflows of Rs 864 crore in April amid uncertain economic environment in the wake of the second wave of COVID-19.
The positive inflow is expected to continue in the financial year 2021-22 as the precious metal remains an under allocated asset in investor portfolios in these uncertain times, Chirag Mehta, Senior fund manager- Alternative Investments at Quantum Mutual Fund, said.
Gold saving funds and gold ETFs have seen net inflow to the tune of Rs 184 crore and Rs 680 crore, respectively in the month of April, according to data provided by Morningstar India.
This comes following net inflow of over Rs 3,200 crore in gold funds in the entire 2020-21, while the same for gold ETFs was more than Rs 6,900 crore as per the data.
"The sharp and intense surge in coronavirus cases this year has fanned hopes that, as an asset class, gold may continue to perform well in the current environment. This has kept investors interest intact in the asset class," Himanshu Srivastava, Associate Director, Morningstar India.
Quantum Mutual Fund's Mehta said that the inability of investors to invest in or liquidate physical gold due to the COVID-19 social restrictions, though painful in the short term, turned out to be a blessing in disguise.
It seems like many investors were finally compelled to acknowledge the drawbacks of physical gold and give up their inefficient preference for holding it, he said.
Further, they chose to optimise their gold holdings by switching to the more efficient gold ETFs or gold saving funds which let them sit in the safety and comfort of their home and enable them to buy and sell gold as and when they want, he added.
Moreover, these instruments have delivered 13-14 per cent annualised CAGR return in the last three years, more than 8 per cent in past five years.
Morningstar India's Srivastava said that the investment environment over the last few years have been extremely conducive for gold as an asset class.
"Threat of an economic downturn and tough market environment provided gold enough reason to unlock its true potential. It did so and delivered superior performance since 2019, consequently helping gold ETFs and gold funds to clock impressive returns over three- and five-year period," he added.
Gold saving fund is a mutual fund that invest in gold ETFs and such fund do not directly invest in physical but indirectly through gold ETFs. An investor can invest in gold saving fund through systematic investment plan (SIP).
On the other hand, gold ETFs are basically exchange-traded funds that invest in gold. They are traded on the stock market and make direct investments in gold.
Ashraf Rizvi, founder and CEO, Digital Swiss Gold & Gilded, said that demand for digital gold that allow access to the yellow metal with ease of use would continue in the current financial year.
"Digital products will continue to grow and crowd out demand for physical gold bars/coins and jewellery as they make the buying and selling process easier, safer, more efficient and less costly," he said.
Going forward, Morningstar India's Srivastava said gold may continue to perform well under the prevailing uncertain environment consequently, gold saving funds and gold ETFs may continue to see traction from investors if this scenario persists.
According to him, gold functions as a strategic asset in an investor's portfolio, given its ability to act as an effective diversifier and alleviate losses during tough market conditions and economic downturns.
"The second wave of coronavirus pandemic and the resulting restrictions are taking a toll on the fragile economic recovery, which could trigger pullbacks in risk assets like equities. Gold could benefit from the resulting risk aversion, just like it did last year," Rizvi said.
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