MFs sweat to source gold for ETFs

Physical unavailability makes operating of such schemes tedious; mutual fund houses and clients' interest in such schemes wanes

Mutual funds which hard-sold gold-backed exchange traded funds (ETFs) or products to clients in the past couple years are now taking it easy while marketing these schemes.

The Reserve Bank of India’s (RBI) restrictions on gold imports, which have created a shortage of the metal, have made it tedious and unviable for MFs to operate these schemes. This has led to their asking distributors to discourage investors from fresh investments into this product.

Reliance MF has officially stopped selling fresh units of its gold savings scheme, a fund of fund. It says this is to support the government in its drive to discourage import and investments into gold. But MF sector officials believe it could also be triggered by operational difficulties in running the scheme.

In gold ETFs, investors do not have to take compulsory delivery of the metal when they buy and sell units of the scheme. However, an MF  has to sell or buy physical gold and store it with a custodian bank on the basis of the units it issues. Now, with the Reserve Bank’s dictat on giving preference to gold exporters and jewellers to source gold over MFs, acquiring gold for funds’ ETFs has been a steep task.

"Most sources to deploy funds into gold have been virtually been cut off. Earlier, we could buy from banks or authorised agencies but now they can only sell to jewellers. State trading houses import only for exporters. The only option left is jewellers but that's very difficult," said an official with a fund house.

The central bank on July 22 had asked banks to ensure a fifth of gold imports be exclusively made available for the purpose of export and the rest for domestic use, typically for jewellers. As fund houses have to adhere to the purity specifications laid out by the capital markets regulator, Sebi, buying gold from jewellers is not a viable option, they say.

“As nominated agencies and banks have to ensure that the demand from exporters and jewellers is met, they are rationing. Demand from gold ETFs is last in that hierarchy, as it is as an investment product,” said a bank official.

According to the Association of Mutual Funds in India, assets under management for gold ETFs declined by nearly Rs 1,000 crore as on June 30 to about Rs 9,600 crore from the previous month. Officials said the disparity in gold prices between the domestic and international market due to the supply issues and currency depreciation could impact the performance of gold ETFs.

Also, the premium on gold imports has surged to a little more than two per cent of the landed cost. Typically, the premium was below one per cent.

“If the restrictions are done away with or if the currency recovers, then  gold prices will normalise. This could hurt the returns made over a period of time,” said the official quoted earlier.

Some sector officials said the situation was under check to a large extent, thanks to the muted inflows into gold ETFs of late, due to the decline in prices. “There is not much interest in gold ETFs. The incremental demand is tapering. Therefore, the impact of the shortage in gold is not visible. If there would have been roaring demand, the supply issues could have got accentuated and would have created problems,” said  Lakshmi Iyer, senior vice-president & head (fixed income and products), Kotak MF.