Gold Linked Funds Gave Better Returns Than Physical Gold In 2019; What Should You Do?

Data from the World Gold Council showed that globally, gold-backed exchange-traded funds (ETFs) and similar products saw net inflows of $19.2 billion or 400 tonnes in 2019. In the December-ended quarter, ETF holdings touched an all-time high of 2,900 tonnes.

Overall, the gold-backed assets under management (AUM) saw a 37 percent growth in dollar terms during the year on increased demand for the safe-haven metal.

In India, AUM of gold funds surged 26 percent to Rs 5,768 crore at the end of December 2019 from Rs 4,571 crore in December 2018, according to data from the Association of Mutual Funds in India (Amfi). Investors put in a net sum of Rs 16 crore in 14 gold-linked ETFs in 2019, the first inflow in 7 years.

Amid US-China trade tensions, gold prices in India surged by over 25 percent and globally, there was an 18.5 percent increase.

While the precious metal gave double-digit returns to its investors, those who invested through related instruments made better gains.

According to a Mint report, world gold funds outperformed them all last year. Two such funds that are open to Indian investors-DSP World Gold and Kotak World Gold delivered returns at 35 percent and 41 percent, respectively in 2019.

What are world gold funds?

World gold funds invest in units of funds that in turn invest in the stocks of gold mining companies listed abroad. On the other hand, gold ETFs and gold mutual funds (that invest in units of ETFs) indirectly invest in physical gold, thus delivering returns close to the metal's prices.

How should you invest in gold?

Gold prices are affected by risks to the global economy. However, an increase or fall in its value is gradual.

Meanwhile, shares of gold mining companies (that world gold funds invest in) have a high beta to gold prices. This means that every time the metal gains, the mining company stocks register a much higher expansion and a decline is also equally dramatic when gold prices fall.

For the short-term, these funds hold the potential to make high returns when the metal gains. However, over long periods (like 5 years), these have delivered lower than investment in gold ETF or physical gold.

In fact, when domestic gold prices saw a 7 percent correction in 2015, DSP World gold and Kotak World Gold made negative returns of 18 percent and 24 percent, each.

Further, due to their investment in foreign equity, their tax treatment is the same as that of a debt fund.

Gold-backed ETFs, on the other hand, are passively managed instruments that are based on price movements in physical gold. A retail investor in India can directly these from NSE or BSE and add to their demat account. These are taxed as non-equity investments and based on individual tax slabs.

Investor demand to remain high

WGC analysts expect investor demand for gold-backed assets to remain robust in 2020. Institutional and individual investors are known to use them to implement their investment strategies as geo-political and economic uncertainties remain.

"The strength of gold was mainly the byproduct of a dovish shift in monetary policy. Our research indicates that a shift from a hawkish or neutral stance to a dovish one has historically led gold to outperform," a WGC analyst said.

Central banks, including the Reserve Bank of India, either cut or held on to its key interest rates in 2019 to push growth in the economy.