I. How ETFs help with disinvestments (Source: mint)

The government is increasingly using the exchange traded fund (ETF) route for disinvestment. Bloomberg Quint points out in a report that funds raised through ETFs have amounted to Rs.48,325 crore since April 2016. This was nearly as much as what the government had raised using the traditional method of selling shares in the secondary market. Besides, the contribution of ETFs has been steadily increasing. In end-November, the government looked to raise Rs.8,000 crore by selling an ETF made up of stateowned companies,then there was talk of a greenshoe option of between Rs.4,000 crore and Rs.6,000 crore. Such was the demand, it ended up raising Rs.17,000 crore in all.

The relatively high demand for a portfolio made up of only government controlled companies is intriguing. Especially after all the negative news about state owned companies underperforming. In many of these companies, profit maximization often takes a back seat to other considerations. A classic example is the decision by oil marketing companies earlier this year to sacrifice part of their marketing margins to help the government contain fuel prices. BSE’s PSU index has declined 22% so far this year, compared to a 4.5% correction in the BSE 500 index.

What then explains the demand from investors? In one word, discounts. The portfolio of stocks that make up the fund have been offered at a discount ranging between 3% and 5%, with most offers ending up at the higher end of the range.

This offers large investors an easy arbitrage trade, which is to apply for the ETFs on offer and sell derivatives in the secondary markets. The trade can be unwound as and when the ETF units are allotted and transferred to the investors. As a result, even foreign institutional investors have jumped in to trade, apart from domestic institutions and high networth individuals. It is worth mentioning that the participation of Life Insurance Corporation of India and Employee’s Provident Fund Organisation in ETF issuances has helped the government.

But unlike direct share sales, which had to be bailed out now and then by institutions controlled by the government, ETF sales have generated strong demand from other quarters as well. Thanks to the discounts and the ability to hedge positions in the derivatives market.

Needless to say, discounts can only generate demand to a limited extent. When arbitrage trades are unwound, there need to be enough investors willing to hold these risky portfolios, where decisions by the executive can change fortunes overnight. In this backdrop, it is a little wonder that the government has had to rely upon other methods to raise funds. One of them is buybacks and large dividends by some state owned firms. The other is getting one state owned firm to buy the government’s stake in another firm, like what ONGC did with HPCL. If anything, such actions should alarm prospective investors even more about value erosion. But strangely they seem to be fine playing along, as long as there is a discount available.

II. Demand for gold remains high in domestic market despite sharp price hike last calendar year 2018 (Source: mint)

Indians are traditionally biased towards physical assets such as gold and real estate. When it comes to the yellow metal, Indians buy it for consumption in the form of jewellery as well as for investment. India is the second largest consumer of gold after China and, according to the World Gold Council, imports an average of 700 to 900 tons of gold each year.

However, the increase in gold prices hit demand in the first half of the year, but buyers came back during the festive season in the second half of 2018. Domestic demand during the first half of the year was impacted severely on account of high prices and weak consumer sentiments. Demand improved during the September quarter on a low base. Typically, compared to first half of the year, the second half witnesses higher demand owing to festive and marriage seasons, when most Indians buy gold.

High Prices

Gold prices increased significantly during the year in the domestic market, reaching nearly a 6year high on 10 October (Rs. 31,909 per 10 grams) compared to the international market. As on 24 December 2018, gold was trading at Rs. 31,254 per 10 grams.

Global gold prices rose by a mere 1% in 2018 on account of increase in United States (US) Federal (Fed) Reserve rate and dollar strengthening. International gold prices have a strong inverse relationship to US Fed rate and rise in USD index (US dollar movement against a basket of six other currencies).

Depreciating rupee was an important factor that impacted gold prices in India. Domestic gold prices, in general, move in line with international gold prices, as over 95% of demand is met through imports. However, despite international gold prices rising marginally this year, domestic prices saw a surge of 5.4% on account of rupee depreciation.

Gold Investment

Apart from buying jewelry for consumption, Indians also invest in gold for long term financial goals such as children’s marriage. But is gold a good investment?

Gold as an asset class is not likely to give substantial real returns. In the last five years, returns from gold have been almost negligible as prices remained stagnant during the period. As on 24 December 2013, gold was at about Rs. 29,500 per 10 grams compared to about Rs.31,250 on 24 December 2018, an annual return of just above 1%.

But you can always consider the metal for diversification. Gold allocation is to invest with the perspective of conserving wealth and having some diversification away from financial assets.

Gold is a good hedge against inflation but does not provide dividend or interest. The government’s Sovereign Gold Bond Scheme, however, gives 2.5% interest per annum on the investment amount. It makes sense to invest reasonably in gold. It is an asset that protects during bad times, is a global currency and can be converted in cash very quickly. It is recommended that 5 to 10% of one’s assets, to be in gold, preferably in a digital way.

Conclusion:

You can choose to invest in sovereign gold bonds and gold exchange traded funds (ETFs). Avoid investing in physical gold, especially jewelry, as you stand to lose 30-40% of its value after paying making and transaction charges. Besides, storing physical gold securely can be a matter of concern.

Experts say that sovereign gold bonds are a better alternative to holding gold in physical form. Investors are also assured of the market value of gold at the time of maturity and periodic interest payment on their investment.

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