Investors return to Gold ETFs with no sovereign bonds in sight

Over the last four months, gold ETFs, which are bought and sold on stock exchanges, have seen inflows worth Rs 4,500 crore compared to Rs 4,728 crore in the financial year ended March 2024.

“Favourable taxation for gold post-budget, reduction in customs duty, fall in gold price and no fresh issue of Sovereign Gold Bonds are driving a set of investors towards gold ETFs,” says Viral Bhatt, founder, Money Mantra.

Gold ETFs had lost their allure among investors in recent years thanks to regular tranches of SGB issuances. These bonds paid an additional 2.5% interest every year over and above the capital gains, while there was no fund management fee. Moreover, capital gains were not taxed if held till maturity. In FY24, investors locked over Rs 27,000 crore in SGBs.

With various news reports suggesting the government may not come up with fresh SGB issuances, investors are either buying gold ETFs or the existing SGBs listed on stock exchanges.

Distributors say demand for gold ETFs is also coming from investors who have completed their tenure of eight years in SGBs and have got maturity money.”Some series of sovereign gold bonds have matured and investors looking to maintain allocation to gold, are now redeploying it into gold ETFs,” says Nikhil Gupta, founder, Sage Capital.In the last one year, gold has returned 19.44% as against the 25% gains in the Nifty.The government’s decision in the recent budget to cut long-term capital gains tax on gold is also encouraging purchases of ETFs. Long-term capital gains tax on gold is at 12.5% if held for more than two years. Earlier, it was taxed at investors’ tax slab.

Fund managers said gold prices are likely to stay strong due to geopolitical uncertainties. “The trend of investments into gold and diversification of reserves continues,” says Chirag Mehta, chief investment officer, Quantum Mutual Fund. “We believe this trend is likely to continue this year amid geopolitical uncertainties in Middle East, elections in Europe, the US and central banks buying to diversify reserves. These would continue to support gold prices.”