Gold ETFs witnessed massive inflows over the last few years. These inflows came in from ETFs launched by just 14 fund houses. If gold goes down further, how would these fund houses face the savers who led to believe that gold ETFs are safe? Here is a live example of why savers end up mistrusting financial services companies
With the recent crash in gold prices would the interest in gold exchange traded funds (ETFs) fade now? Most certainly investors would think twice as over the past year the price of gold ETFs has gone down by more than 8% and as much as 13% in the past three months. In the last three days ETFs have crashed by nearly 8%. Gold ETFs have always been a risky idea not only because gold is a purely speculative product—it neither generates income nor it is clear under what circumstances it creates wealth. Gold ETFs are gold acting as stock and they would naturally behave like one—turning volatile and even going down for months together of gold prices decline. If so, those who have invested in gold ETFs thinking that they have invested in a safe product will be in for a rude shock. The question is, did not fund companies know this essential flaw in gold ETFs? Why did they launch them?
We have always brought out a simple fact of the fund management business: their income is fixed and dependent on the amount of money they manage. The amount of money they manage is dependent on the number of schemes they launch and when they launch. Interestingly, fund houses launch the largest number of schemes when a particular investment idea is hot: This is why we have 19 infrastructure schemes. When equity schemes witnessed a rally post 2003, we saw fund houses rushing to launch new fund offers. Nearly 200 different equity schemes were launched during the period from January 2003 to December 2007. Even in the five-year period post December 2007 up to December 2012 we saw nearly 100 equity schemes being launched.
Gold has been hot for a few years now and no wonder fund companies jumped in to offer gold ETFs. But it is instructive that many houses have avoided gold ETFs too. Out of the 40+ fund houses 14 have launched gold exchange traded funds.
From April 2010 to March 2012 saw massive inflows in gold ETFs. A majority of the gold ETFs were launched post March 2010. Gold ETFs in FY11 and FY12 saw an addition of over 3 lakh folios bringing in a net inflow of nearly Rs6,000 crore. This was at a time when equity mutual fund schemes were losing folios and facing high redemptions. Over the two financial years, equity schemes witnessed an outflow of over Rs13,000 crore and lost nearly 35 lakh folios.
Schemes like Goldman Sachs Gold BeES, R* Shares Gold ETF, SBI Gold ETS and Kotak Gold ETF currently have the largest corpus going above Rs1,000 crore. However, on the list are Birla Sun Life Mutual Fund, HDFC Mutual Fund, ICICI Mutual Fund and Reliance Mutual Fund. These fund houses have amassed a large corpus in their equity schemes and debt schemes. Gold ETFs seemed an attractive proposition as well to them. Some have gone on to launch gold savings schemes (gold mutual fund schemes which invest in gold ETFs) so that investors could skip the exchange route. It is surprising to see Quantum Mutual Fund join the gold rush, as it always promotes itself as pro-investor. It possibly does not understand that gold ETFs is a flawed product.
If gold is supposed to be a must-have asset class, acting as a hedge against inflation, why have so many fund houses, especially the large ones, abstained from launching gold schemes? In our view, it would reflect commendable clarity on their part that gold ETFs are not products for the masses. Top fund houses that have not launched gold ETFs include IDFC Mutual Fund, Fidelity Mutual Fund (the assets are now owned by L&T Mutual Fund) and Franklin Templeton.
According to data by Association of Mutual Fund in India (AMFI), the growth in the number of folios of gold ETFs from September 2011 to September 2012 was a mere 15% from 4.12 lakh folios to 4.75 lakh folios during these 12 months. This is highly subdued as compared with 75% growth in the number of retail folios registered from September 2010 to September 2011 period. Over the six month period, from September 2012 to March 2013, the number of folios grew by under 20% to 5.69 lakh folios. Surprisingly these folios come from just 14 schemes.
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