Virtual asset

Even though you can’t flaunt it, a gold exchange-traded fund allows you to bask in the metal’s financial aura.

By Rajshree Kukreti | Print Edition: March 8, 2007


"If you are buying gold for six months or one year, go to the futures market. But if it is for a longer period, GETF is for you"
Sanjiv Shah, executive director, Benchmark AMC
"Indian investors still fancy gold as ornamentation. It will take time for the masses to accept GETF as an investment option"
Brijesh K. Dalmia, CFP
King Midas of legend seemed to have touched every asset ranging from equity to real estate in 2006. But 2007 may not see quite such generous returns, warn analysts. Inflation is hovering at 6.3% and financial planners are increasingly interested in gold as an useful diversification tool.

Gold doesn’t move closely in tandem with common financial assets such as equity or debt. Gold holdings not only reduce volatility, the yellow metal is also a great inflation hedge. Theorists say that holding between 5% and 15% in gold lowers your portfolio volatility and offers improved returns, in the bargain.

But few individuals have so much exposure. “In cases of investors with large portfolios, I rarely find such allocations to precious metals. Even those who do have allocations, hold gold in the form of jewellery, that too 18K (carat) or 22K,” says Brijesh K. Dalmia, a Kolkata-based CFP.

The drawbacks to holding gold are many. It’s only available in large lots. Prices are not transp a r e n t a n d can vary a lot. It’s physically heavy and of uncertain purity. It requires expensive assays and secure storage. A new type of instrument, the Gold Exchange-Traded Fund (GETF) can eliminate many of these irritants. An ETF makes it unnecessary for investors to hold the physical metal in order to derive financial benefits.

The GETF from Benchmark Asset Management Company (BAMC) may thus help investors to balance their asset allocations. The Gold BeES (short for Gold Benchmark Exchange-Traded Scheme) will be listed on the National Stock Exchange (NSE). Kotak Mutual Fund (KMF) is also set to launch a GETF within a fortnight. “The structure is now being finalised,” says Sandesh Kirkire, CEO, KMF.

A GETF is listed and traded on the stock exchange (SE) just like a demat share. Open a demat account and a trading account with the SE broker. Just instruct your broker to buy or sell the units. While a GETF is a long-term investment, it can also be traded intra-day at real time prices. “Benchmark will sell gold exchangetraded funds with each unit representing 1 gm of gold. Our whole idea is, don’t worry about where gold prices are,” says Sanjiv Shah, executive director, Benchmark AMC.

The market lot will cost roughly as much as 1 gm of gold. But you cannot flaunt your ownership at a social occasion. A GETF is “virtual”—it tracks the price of gold but it cannot be converted to the metal. The handling expenses are capped at 1% of the total value of units held per annum. You also pay brokerage every time you trade an ETF—the rates typically range from 0.25% to 0.5%. The “slippage” is a lot less than the commissions and discounts most jewellers will charge on physical metal. And there are no worries on the purity score either with an ETF.

The GETF will use the London Bullion Market Association (LBMA’s) price in dollar per troy ounce (about 31.1 gm) as the base price (see GETF Pricing). The actual GETF price will be higher than LBMA due to customs duties at Rs 1,000 per kg and VAT at 1%. Gold prices across India are reported through a poll of bullion dealers who use similar pricing formulae. So GETF prices will correspond closely to the local spot price.

The fund issues units against gold bought by authorised participants (APs). It has appointed five APs, who are all independent goldbrokers. The APs will accept physical delivery after the new fund offer (NFO) and they will continue to deal in gold. The Bank of Nova Scotia will be the custodian. The APs break up the bulk units and sell them on exchanges.

 Thus, they are the marketmakers and will play an active role in providing liquidity to the investors. The NFO of BAMC closes on February 23, after which it will be available on the NSE at its NAV. But if you prefer NFOs, you can wait for Kotak’s or UTI’s GETF which are likely to hit the market in March.BAMC specialises in ETFs and the AMC has a good track record. But like any mutual fund, you must consider risks like liquidation and mismanagement. It’s up to you to weigh the risks and benefits of real gold versus virtual gold. Assuming efficient administration, the GETF must be taken seriously.

(with Tejas Bhope)

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