With gold bonds making a debut, there are doubts on whether gold-backed exchange traded funds will lose sheen. BusinessLine spoke to Sundeep Sikka, CEO, Reliance Capital Asset Management, to understand if there is still a case for investing in gold ETFs. Post-merger between Goldman Sachs and Reliance Mutual Fund (pending approval), the latter will become the country’s largest player in gold ETFs, with a total holding of about 16.5 tonnes of gold.
Sundeep Sikka believes that gold ETFs will continue to remain attractive for retail investors as it will let them park their funds via the SIP mode, offering an effortless way to invest in gold. Excerpts from the interview:
Not really. Gold bonds and gold ETFs offer different benefits to investors, and I believe that they will co-exist.
Gold bonds are issued for a minimum tenure of five to seven years. Therefore, investors have to necessarily invest for the longer term.
If they seek to encash their investments before the slated term, they have to sell their bonds in the markets, the price of which will be determined by the prevailing demand-supply scenario. The price could be a function of the tenure and investors’ outlook on gold. Gold ETFs, on the other hand, do not have any specific tenure, and could be considered for any investment tenure. Also, with gold bonds there is an investment limit of 500 grams per person per year, but, there is no such investment cap on gold ETFs.
How do gold ETFs score over gold bonds?
Gold ETFs offer an efficient and convenient mechanism for investors to take real-time exposure to gold. Gold ETFs can be accessed through two lakh-plus terminals across the country. For retail investors, systematic investments in Gold ETFs and gold savings funds are a great proposition and will continue to attract interest.
Do gold ETFs really mimic returns of gold? Isn’t there a cost attached to this investment that eats into an investor’s returns?
Gold ETF is a very transparent product, wherein charges are minimal. Today, if you buy gold in the market, the cost of buying it and storing it is much more. But in gold ETFs, all costs put together will be about 50 basis points and it saves the cost of locker rentals too. The bigger risk of buying physical gold stems from false claims on purity, but, this doesn’t happen at all with gold ETFs — as the custodian sources gold from LBMA approved refiners and it is of 24 karat.
Why have gold ETF units been trading at a premium to their net asset value (NAV) in recent times?
Logically, ETFs should trade at a price close to NAV, but depending on demand-supply and liquidity for the instrument, prices go up or down. But the gap doesn’t remain for long, it gets bridged soon.
How is the demand for gold ETF units currently? How do you see purchases this Dhanteras?
Indian investors always see the last six months-one year return to make new investments. Gold has been doing badly for last three years, so, fresh flows into gold ETFs have slowed down. But, people are emotionally attached to gold. Slowdown in returns will not influence buying on Dhanteras.