What's Driving Record Inflows into Gold ETFs

So far in 2025, gold is continuing to prove its worth by reaching new lifetime highs in both domestic and international markets. As of February 19, 2025, the MCX spot price per 10 grams of gold stood at Rs 86,360, having soared by an absolute 13.8% in the current calendar year.

The outperformance of gold compared to equities has turned the spotlight on investments in Gold ETFs. Gold ETFs are passively managed mutual funds that aim to track the domestic price of physical gold by making direct investments in gold.

Data from the Association of Mutual Funds in India (AMFI) shows that net inflows into Gold ETFs increased by a staggering 486% from Rs 640 crore in December 2024 to a record high of Rs 3,751 crore in January 2025.

Furthermore, the net assets under management (AUM) of Gold ETFs increased from Rs 44,595 crore in December to Rs 51,839 crore, an approximately increase of 16.2%, while the folios increased to 6.5 million, revealed the AMFI data.

Why Are Investors Turning to Gold ETFs?

1. Global Uncertainties

One of the main factors behind investors' preference for Gold ETFs is U.S. President Donald Trump's protectionist policies and their strain on global trade.

Notably, the Trump administration has threatened to impose a 25% tariff on Canada and Mexico and a 10% tariff on China. Additionally, it has announced 25% tariffs on all steel and aluminium imports and has proposed plans for reciprocal tariffs.

India imposes an average weighted tariff rate of 9.5% on US exports, which is significantly higher compared to the U.S.'s 3% tariff on Indian goods. This leaves the country vulnerable to retaliatory tariffs.

Additionally, geopolitical tensions around many parts of the world (such as the prolonged Russia-Ukraine war and the Middle East crisis) continue to create instability in global markets.

With the global uncertainties expected to continue in the near future, investors are increasingly looking to gold in uncertain times due to its reputation as a safe-haven asset.

[Read: How Gold is Expected to Perform Under Trump 2.0]

2. Weakness in the Domestic Equity Markets

While the equity market witnessed a stellar rally in recent years, over the past few months stocks across market caps have witnessed severe corrections from their record highs of 2024 coupled with sharp volatility. This can be attributed to heavy selling by foreign investors due to several factors such as global uncertainties, a weakening rupee, a slowdown in GDP growth, as well as weaker earnings growth of India Inc

This volatility, marked by periodic corrections, has likely heightened investors' risk aversion and pushed them towards Gold ETFs as a safer alternative and as means of diversifying their portfolios.

3. Hedge Against Inflation

Gold has long been considered as an inflation hedge. While inflation has softened from its peak, sticky food inflation, volatility in energy prices, and adverse weather events pose a upside risk to the inflation trajectory and render the outlook uncertain. In such an environment, investors are turning to Gold ETFs as an effective portfolio diversifier and a protective measure against inflation.

4. Lower Interest Rate Expectations

The US Federal Reserve has cut interest rates by 50 bps so far and is expected to cut rates by a further 50 bps in 2025. Meanwhile, the RBI too has cut policy rates by 25 bps and may reduce it further by 50 bps during the year.

In a low-interest rate environment, non-yielding assets such as gold (assets that do not offer interest or dividend) tend to benefit as investors move away from savings bank account and other interest-bearing instruments.5. Discontinuation of Sovereign Gold Bonds (SGBs)

The central government recently discontinued the SGB scheme, mainly due to high borrowing costs. With no new SGB tranches being issued, investors are shifting their focus to Gold ETFs as an alternative way to invest in gold.

What are the Prospects for Gold in 2025?

Gold continues to be a crucial part of a well-diversified portfolio and a strategic long-term investment. Analysis by the World Gold Council (WGC) shows gold to be a clear complement to equities and broad-based portfolios.

Given its strategic significance and the economic uncertainties that continue to loom ahead, WGC believes that investors should carefully consider the portfolio benefits gold can offer in 2025 and beyond.

Gold has historically provided strong returns, diversification, and liquidity. These attributes collectively enable gold to enhance a portfolio's risk-adjusted returns.

During periods of severe economic slowdown or recession in the past, gold has demonstrated its sheen and outperformed equities. In such times, smart investors tend to favour gold or high-quality debt instruments.

Global Central banks are also steadily continuing to purchase gold, which will likely support gold prices and increase investor confidence. The demand from these institutions crossed 1,000 tonnes for the third consecutive year in 2024.

Why prefer Gold ETFs over physical gold?

Gold ETFs offer investors an innovative and cost-efficient way to invest in gold without having the hassle of physically holding it. The units purchased are backed by 0.995 finesse of physical gold. The physical gold is held in vaults by an appointed custodian for the Gold ETF by the mutual fund house on your, the investors' behalf. Besides, this gold with the custodian is insured and valued periodically, as per the guidelines stipulated by the Securities and Exchange Board of India (SEBI).

Thus, the investor can own gold without having to worry about making charges (as in the case when purchasing gold in a physical form), storage hassles, risk of misplacing, theft, etc.

The aim to generate returns broadly in line with the domestic price of gold and gold-related instruments subject to a tracking error. So, when gold appreciates and the NAV goes up, investors benefit. Investors can easily buy gold using a Demat account, similar to buying shares on stock exchanges.

Gold ETFs are highly liquid and the transactions are executed at the prevailing NAVs without the necessity of lengthy quality checks.

To Conclude...

Gold ETFs provide you, the investor, an excellent opportunity to diversify your portfolio and adopt sound asset allocation strategies.

Unlike financial assets, gold is a real asset, meaning it does not carry credit or counterparty risk. Gold is a strategic long-term asset class. Investors can consider tactically allocating around 10% to 15% of their investment portfolio to gold, maintaining a long-term perspective (5 to 10 years) and assuming moderately high risk.

[Read: Equity, Debt, and Gold - Performance Review and Investment Outlook for 2025]

Approach your gold investments sensibly.

Happy investing!

We are on Telegram! Join thousands of like-minded investors and our editors right now.

DIVYA GROVER is the co-editor for FundSelect, the flagship research service of PersonalFN. She is also the co-editor of DebtSelect. Divya is an avid reader which helps her in analysing industry trends and producing insightful articles for PersonalFN’s popular newsletter – Daily Wealth letter, read by over 1.5 lakh subscribers.
Divya joined PersonalFN in 2019 and has since then used stringent quantitative and qualitative parameters to analyse funds to provide honest and unbiased research to investors. She endeavours to enable investors to make an informed investment decision and thereby safeguard their wealth.

Disclaimer: Investment in securities market are subject to market risks, read all the related documents carefully before investing.
This article is for information purposes only and is not meant to influence your investment decisions. It should not be treated as a mutual fund recommendation or advice to make an investment decision in the above-mentioned schemes.