Investors cash in on soaring gold price, cash out of ETFs in August

Gold Exchange Traded Funds (ETFs) saw massive profit-booking last month as investors sold funds to take advantage of soaring gold prices which topped Rs 33,000 in August, following the slide in the local currency coupled with the rise in import duty on gold and fears of a military strike on Syria by the US.

With gold prices peaking, investors in gold ETFs are staying away and heavy profit-booking by them resulted in net redemptions of Rs 588 crore from Gold ETFs in August this year — the highest single month redemption in over six years.

In fact, investors have been consistently booking profits in gold ETFs for the past three months since the rupee started to weaken against the dollar.

According to Association of Mutual Funds in India (Amfi), gold ETFs have reported net redemptions of almost Rs 900 crore in the past three months alone, a trend witnessed for the first time in gold ETFs since these schemes were launched in February 2007.

The number of investor portfolios in gold ETFs have also shrunk from a record high of 6.06 lakh portfolios in May to 5.87 lakh in July this year and it is quite likely to have shrunk further in August —for which data is not available now.

"Investors cannot digest gold giving negative returns and hence have exited at an appropriate opportunity," says Lakshmi Iyer, head-fixed income, Kotak Mutual Fund. The yellow metal has generated negative returns of 3.8% in the past year, after having risen a multifold over the past six years. But Lakshmi does not believe that the current trend reflects a change in perception about gold among Indian investors.

"While gold demand is likely to be muted and there may be further profitbooking till the time the rupee stabilises against the dollar, we do not expect investors to exit their investments in gold significantly and move to other asset classes such as equity. In fact, With the Sensex at 20000 levels, investors may very well tread cautiously in equities," she says.

Interestingly, equity funds, including equity linked savings schemes (ELSS) reported net inflows of over Rs 450 crore last month after redemptions of over Rs 1,800 crore in July. But according to ICICIBSE -1.03 % Prudential Mutual Fund MD & CEO Nimesh Shah, this is due to lower redemptions seen in August, because of subdued equity markets.

There has not been any significant change in gross sales of equity funds, he says. Association of Mutual Fund in India (AMFI) data show that gross sales in equity schemes have, in fact, shrunk for the third straight month from Rs 3,180 crore in June 2013 to Rs 2,811 crore in July 2013 and Rs 2,660 crore in August 2013.