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Gold ETFs nearly ready to go in India

Section: Daily Dispatches

India's Gold Exchange-Traded Funds in Final Stages

From the Indian Express, Mumbai
Friday, December 1, 2006

MUMBAI -- After a long wait, investors can now hope to buy and sell gold like shares on the stock exchanges. The Securities and Exchange Board of India (Sebi) is in the final stages of clearing gold exchange-traded funds in India, the largest market for the yellow metal in the world.

Though two mutual funds -- Benchmark Mutual Fund and UTI Mutual Fund -- have already submitted proposals for gold funds in the market, the market regulator took its own time to fine-tune the concept. Many other fund houses, including DSP Merrill Lynch, are also interested in coming out with these funds.

"We are expecting the Sebi to clear these two schemes soon," says the chairman of the Association of Mutual Funds of India, A.P. Kurien. "This instrument would give small investors a chance to accumulate gold in small amounts over years and help them to diversify their portfolio," he said, adding, "and when he wants to sell, he can either get gold or simply sell the units."

The regulator has amended the Custodian of Securities Act, enabling the custodians of the proposed gold funds to outsource the safekeeping of bullion to outside agencies. But the Sebi has made it clear that the custodians would be responsible to clients (mutual funds) for safekeeping of the gold kept with other persons, including any associated risks.

ETF is a new term for Indian investors. Globally ETFs handle assets worth billions of dollars. There are over 300 ETFs in the U.S. alone. "For Indian investors, it will be a new investment avenue ... our investors are familiar with the gold market and its price movements," a mutual fund source said.

The new fund will track the price of gold. Its appointed custodians will buy and sell gold bullion as investors look at positions in the ETF.

The gold ETF idea was proposed by Finance Minister P. Chidambaram, who wrote in the Union Budget 2005 that Sebi should permit, in consultation with the RBI, mutual funds to introduce exchange-traded funds with gold as the underlying asset. Such a move would enable any household "to buy and sell gold in units for as little as Rs 100," and these units could be traded in the same manner as mutual fund units, he said.

As the first step, Sebi had recently allowed domestic mutual funds to invest in ETFs abroad. ETF tracks a particular index or sector and seeks to replicate its performance by owning the securities that make up the index or sector, no matter how broad or narrow a segment of the market it may be. Thus an ETF may include several dozen or sometimes several hundred or even several thousand securities. As the number of indexes continues to grow, there is an increasing variety of ETFs in which to invest.

The gold ETF was first officially conceptualised by Benchmark Asset Management Co. in India when it filed a proposal with the Sebi in May 2002. It was not launched since it did not receive regulatory approval. The first gold exchange-traded fund actually launched was in March 2003 on the Australian Stock Exchange under Gold Bullion Securities. India, which has gold worth Rs 24 lakh crore, is also one of the largest consumers of gold in the world and absorbs around 700 tonnes of the world’s annual consumption of about 3,200 tonnes.

An exchange-traded fund is a security that tracks an index and represents a basket of stocks like an index fund but trades like a stock on an exchange, thus experiencing price changes throughout the day as it is bought and sold.

In the case of UTI's proposed gold fund, the units issued under this scheme will be referred to as UTI Goldshare and will have a face value of Rs 100 each. Investors who want a cost-effective and convenient way to invest in gold can get an instantaneous exposure to the physical asset. Its units can be traded like a share and one can buy and sell them quickly at the ruling market price, unlike physical gold, which can be sold only for a discount and by a cumbersome process.

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