Q: The first gold ETF was launched in India in 2007. What was the investor landscape like at the time and how did the market develop subsequently?
A: In the early 2000s, while at Benchmark Asset Management, we pioneered equity ETFs in India. Then, in 2003, we began to look at gold ETFs. It took a while to obtain regulatory approval so we finally brought the first Indian gold ETF to market in 2007. Initially, we saw a fair amount of interest, particularly after the financial crisis. But demand ebbed away for three key reasons. First, India has a huge cultural affinity for gold but interest has traditionally centred on physical gold so the concept of a gold ETF was very new. Second, gold as an asset class fell out of flavour since 2013, particularly as equity markets were rising at that time. And third, the government introduced sovereign gold bonds in 2015. These eight-year bonds offer very little liquidity but they pay annual interest and, if the gold price rises, capital gains are tax free.
Q: How would you characterise market sentiment towards gold ETFs today?
A: There has been a surge of demand recently. In just six weeks, from the beginning of April to the middle of May, we added 35,000 new investors – that is a 17% increase in customer numbers. Wealth managers across the country are advocating exposure to gold investment products and there is particular interest from high net worth and ultra-high net worth individuals. Younger generations are drawn to the market as well, seeing ETFs as a smart way of investing in gold rather than buying physical gold. Essentially, it is in times of stress that people recognise the value that gold can bring to a portfolio.
Q: What is the split between retail and institutional investors?
A: The Indian gold ETF market is valued at about US$1 billion at the moment. In terms of assets under management, around two-thirds of the market is retail and the rest institutional. In terms of numbers, more than 95% of investors are individuals.
Q: Looking ahead, how do you think the market can sustain recent growth levels?
A: As I mentioned, India has a centuries-long affinity with physical gold. As a country, we import around 800 tonnes a year, accounting for approximately 25 per cent of global demand. In other parts of the world, such as the US, investment products account for 80-90% of demand for gold. In India, it’s the reverse and that will take time to change. But I think it will change. There are lots of issues around physical gold. Purity is hard to gauge, different vendors offer different prices, storage can be a challenge and people are often disappointed at the price they are offered when they come to sell their gold.
Looking ahead, the outlook for gold ETFs seems promising. India is a very young country and I think that younger people will increasingly see the appeal of gold investment products, such as ETFs. Policymakers can help in this regard. India has two levels of capital gains tax, Short-Term Capital Gains (STCG) and Long-Term Capital Gains (LTCG). The higher levy applies to assets held for three years or less. The lower level applies to assets held for more than three years. At the moment, gold ETFs are subject to the three-year rule, but I believe a tax benefit to listed, gold-linked products could lure investors away from physical gold. LTCG for listed, gold-linked ETFs could be reduced to one year as an incentive. This would reduce demand for physical gold thereby reducing India’s dependence on gold imports.
Q: Has the Nippon India Gold ETF made any investments in the government’s Gold Monetisation Scheme (GMS)?
A: We had around 15-20% of our assets in the GMS initially but, in 2017, the introduction of the Goods and Services Tax resulted in some tax anomalies around the GMS. As a result, we did not renew any of our GMS deposits, so we are not invested at all now.
Q: Systematic Investment Plans have proved popular in India in recent years. Can the gold ETF market learn anything from this and from the growth in mutual funds more widely?
A: Most large fund houses, including ours, offer Gold Saving Plans (GSPs). Through the GSP, it is easy for investors to start Systematic Investment Plans. At Nippon, our GSP invests in our gold ETF so investors can either invest in the Gold ETF or the Gold Savings Plan, depending on their preference and comfort levels.
It’s generally easier to implement a Systematic Investment Plan strategy in a traditional mutual fund format like a GSP. Investors can approach asset management firms directly to set up a plan and they are provided with a single end-of-day valuation too. ETFs are different because they are purchased via broker platforms. Broking platforms should be able to offer SIPs and a number of the larger firms are beginning to do so but the concept is still pretty new.
Q: What lessons can be learnt from the global ETF market?
A: The Indian market-making community is still relatively small, especially when it comes to bullion and we would really benefit from a much larger market-making ecosystem. Gold ETF investors would benefit if more bullion dealers started participating in the market-making of Gold ETFs. We are already seeing signs of positive change but a bit more momentum would be very helpful. The Securities and Exchange Board of India (SEBI) has allowed gold ETFs to invest up to 50% of assets under management in commodity derivatives. However, it is worth bearing in mind that trading in commodity derivatives is still nascent so there is an element of natural evolution. The current spurt in interest in Gold ETFs will only act as a fillip to this.
Q: The COVID-19 pandemic has sent shockwaves through financial markets and the gold price has risen significantly so far this year. How do you think that will affect the gold ETF market over the longer term?
A: Interest in the market has been rekindled after a lull of six or seven years and that is very welcome. Over the past year or two, we have spoken to distributors and investors, stressing the value of gold as an asset within a diversified portfolio. But investors were not enthused by gold’s performance, especially as equity markets were doing so well. Now people are recognising gold’s role in an investment portfolio. They are moving into gold ETFs and I hope that we will see steady growth in the market for time to come.
Q: What are your views on the optimal allocation to gold within an investment portfolio?
A: Many studies have been conducted on this and they generally conclude that the range is between 5% and 20%. I think investors should consider allocating 15-20% of their portfolio to gold. Gold is considered a safe haven asset that can come into its own during a crisis, such as a pandemic or a market crash. At such times, it can offer genuine protection from falling prices elsewhere.
Q: Is now a good time to be invested in gold?
A: I am not one for making market forecasts but gold has already risen by more than 30% over the past year so it is unlikely to make similar gains over the next 12 months. However, I don’t believe that investors should look at gold from the perspective of returns – they should look at gold as a means of protection. There is another dimension in India too. As a net importer, our currency, the rupee, depreciates by 3-4% every year so I always tell investors that it is important to have a wide spread of assets and it is important to consider gold in their portfolio. Even if the price does not increase from one year to the next, gold still has the potential to protect them against that currency depreciation.
All views expressed in this article are personal.