Gold ETFs witness highest inflows in 16 months: Is it time to invest in the yellow metal?

Gold Exchange Traded Funds (ETFs) have witnessed a decent surge in inflows in August, marking a significant uptick in investor interest. According to Association of Mutual Funds in India (AMFI) data, these ETFs saw net inflows of Rs 1,028 crore, a figure substantially higher than the previous month's inflows. Notably, this marks the highest net inflow in this category in the last 16 months.

Gold ETFs function as electronic representations of physical gold, stored electronically in a demat account. These ETFs are listed on stock exchanges, providing real-time price updates. Unlike SIP-based investments, gold ETFs offer flexibility for experienced investors to analyze the market and invest based on their understanding, while SIP investments are more user-friendly for beginners.

Gold ETFs typically invest 90 percent to 100 percent in 995 pure gold, allocating the remainder to debt. Their liquidity is a distinct advantage, as they lack exit loads. This means investors can buy or sell units at any time during market hours, providing ease and convenience.

Analysts and market experts have been closely examining the factors behind this sudden influx of funds into Gold ETFs. According to Melvyn Santarita, an Analyst specialising in Manager Research at Morningstar India, several key factors are at play.

With continued increase in interest rates in the United States, persistent inflation rates exceeding expectations, and a noticeable slowdown in economic growth, the appeal of gold as a safe haven and a hedge against inflation remains robust.

In times of economic uncertainty, investors traditionally flock to gold, viewing it as a reliable store of value.

Another factor contributing to this trend is the recent correction in gold prices from their all-time highs.

"Following a sharp rally since March of this year, gold prices have eased somewhat. This dip has created a perceived buying opportunity for investors who have been waiting on the sidelines," Santarita said.

During the last year, the yellow metal has given a return of 13-15 percent. It has given a 12 percent return in dollars.

According to Nish Bhatt, Founder & CEO at Millwood Kane International, gold prices may rise further due to festive demand in India.

Colin Shah, the Managing Director of Kama Jewelry, also highlighted the upcoming festive season as a potential driver of further gold demand. Despite a stagnant phase in gold prices due to economic challenges in the US, there is optimism that gold demand will surge. This optimism stems from the robust performance of stock markets and the cultural significance of gold during festive and wedding seasons.

In light of these developments, investors face a crucial decision if they should continue investing in gold ETFs?

While market dynamics should guide investment decisions, experts believe that gold ETFs offer distinct advantages over physical gold, including liquidity, easy trading, minimal storage concerns, and reduced taxes. They offer real-time pricing on stock exchanges and cater to both experienced investors who want to analyse the market and beginners who prefer systematic investment planning (SIP).

However, just like stock market investments, experts suggest to be cautious while investing in gold ETFs.

"Rash buying and selling could result in heavy losses that will affect the investment portfolio. It would be advisable to use gold ETFs in India as safe assets and hedge investment rather than as a daily profit-trading tool," as per Bankbazaar.