Even as equity markets and gold have enjoyed a similar rally since March this year, investors have shown much more appetite for the allure of gold ETFs than equity mutual funds

It is a tale of two asset classes that have evinced contrasting interest from investors. Both equities and gold have enjoyed a remarkable run since March this year, recording around a 20% jump each till now. But while the rally in stock markets has failed to enthuse equity mutual fund investors, gold ETFs have enjoyed phenomenal patronage from the investor community.

Clearly, the equity market is no longer the preferred destination for investors here. Since March this year, the Sensex has surged almost 19% from 17,528 to 21,000 now and is now hovering around a new all-time high. Meanwhile, equity mutual funds have witnessed a torrid time. The number of equity folios has gone down an alarming 4% from 402 lakh to 386 lakh. Equity MFs have witnessed outflows to the tune of Rs21,200 crore over this period.

In sharp contrast, gold exchange traded funds (ETFs) have been attracting investor money by the buckets, on the back of a phenomenal surge in the price of the yellow metal. Since March this year, gold prices have risen by around 21% from Rs16,232 to Rs19,970 now. The popularity of gold ETFs has soared as a result, with retail folios in gold ETFs jumping by a massive 65% from 142,270 to 235,218 over this period. Inflows into gold ETFs have surged 80% over the same period.

Heads of various asset management companies (AMCs) have attributed the waning interest in equity mutual funds to the stretched valuations in equity markets. Investors are booking profits and getting out of the market, they argue. However, as Moneylife has been pointing out regularly, this is not entirely true as equity MFs have witnessed a steady leakage of cash for more than a year now - which has little to do with the stock markets. The ban on entry load in August 2009 has had far-reaching consequences on the industry, which has found it difficult to cope up with many of the whirlwind changes introduced by the regulator, the Securities and Exchange Board of India (SEBI).

At the same time, gold ETFs have emerged as the favoured investment avenue for the retail population, seduced by the relentless rise in gold prices. Many investors have accepted the continuing rally in gold as a foregone conclusion and put their savings in this asset, cheered on by AMCs and their distributors.