 "Arbitrage opportunity between gold fund variants?")
Say you have invested in a gold exchange-traded fund (ETF). And, you expect the net asset value (NAV) of the fund to more or less move with gold prices because the underlying commodity of the ETF is gold. It is much like investing in an ETF that represents the Sensex or the Nifty.
Similarly, if you invest in a gold savings fund that invests in ETFs, the returns should be similar to gold ETFs. At best, there could be a marginal difference of 0.5 per cent or one per cent but not too much.
Now, here's the surprise. The Axis Gold ETF has fallen 13.04 per cent in the past year, whereas the Axis Gold fund has fallen just 5.4 per cent. In other words, the mirror image has given better returns - nearly eight per cent - than the underlying asset. To put the eight per cent in perspective, the best savings bank rate is seven per cent, State Bank of India is offering nine per cent for a one-year fixed deposit and only three equity fund categories have given over 8 percentage points in the past year - technology 49 per cent, pharma 21 per cent and international 11 per cent.
According to officials in the mutual fund sector, this difference started emerging since September and has taken serious proportions. So, how is it possible that the underlying ETF performs worse than the saving scheme? The answer lies in the way these products are valued. Says a fund manager: "The valuation norms for these schemes are quite different. This arbitrage is a result of that." That is, the buyers of gold exchange traded funds get the NAV of the scheme and the returns of most schemes are similar. For instance, the monthly returns of the gold ETFs of Axis, Canara Robeco, HDFC, ICICI Prudential, IDBI, Kotak and SBI are similar - around minus six per cent. It is similar for annualised returns as the NAVs of these schemes have fallen to 12.8-13.2 per cent.
Returns from Reliance Gold ETF and Birla SunLife Gold ETF are different because they are likely to have bought gold at different levels. Given the similarity in returns, investment advisors seldom tell you to choose between gold ETFs.
However, in comparison, the NAVs of gold savings funds are given according to the market price of the ETF. The catch lies there: Whereas the price of gold - the underlying commodity in ETFs - has been falling due to import restrictions and increase in duties, the units of the ETFs are trading at a premium on stock exchanges. As a result, the NAVs of gold savings funds have gone up sharply.
Depending on the variance in the trading value of their respective ETFs, the returns from gold savings funds of different fund houses are higher by five-eight per cent - a difference of a good 300 basis points even amid savings funds.
What should investors do? Investors who have bought units of ETFs might feel aggrieved that they are doing worse than the gold savings funds. It's because if the buyer goes to actually sell the ETF units, he is quite unlikely to get the tradable NAV. This is due to a lack of depth in the market. There are very few participants in the trading of gold ETFs. Most likely, sellers will have to exit at a discount.
Among gold funds, there is a third variant: Gold mining funds. Only two fund houses, Pinebridge and DSP BlackRock, have mining funds and both are doing dismally - having fallen over 40 per cent in the past year. These are fund-of-funds schemes and invest in the equities of mining companies globally.
The lesson: According to industry experts, this sharp difference is not something to be alarmed about due to the negative returns of the schemes. "Also, the outlook on gold is not very positive after the tapering announcement by the Federal Reserve. So, there isn't much of an opportunity that one can take advantage of. If such anomalies arise when gold prices are positive, investors would be able to make a killing," says an analyst. Also, market players say that there is a strong case for the regulator - the Securities and Exchange Board of India - to look into the valuation norms of savings funds. Mispricing between two similar products with the same underlying asset can cause serious problem in future.
Similarly, if you invest in a gold savings fund that invests in ETFs, the returns should be similar to gold ETFs. At best, there could be a marginal difference of 0.5 per cent or one per cent but not too much.
Now, here's the surprise. The Axis Gold ETF has fallen 13.04 per cent in the past year, whereas the Axis Gold fund has fallen just 5.4 per cent. In other words, the mirror image has given better returns - nearly eight per cent - than the underlying asset. To put the eight per cent in perspective, the best savings bank rate is seven per cent, State Bank of India is offering nine per cent for a one-year fixed deposit and only three equity fund categories have given over 8 percentage points in the past year - technology 49 per cent, pharma 21 per cent and international 11 per cent.
According to officials in the mutual fund sector, this difference started emerging since September and has taken serious proportions. So, how is it possible that the underlying ETF performs worse than the saving scheme? The answer lies in the way these products are valued. Says a fund manager: "The valuation norms for these schemes are quite different. This arbitrage is a result of that." That is, the buyers of gold exchange traded funds get the NAV of the scheme and the returns of most schemes are similar. For instance, the monthly returns of the gold ETFs of Axis, Canara Robeco, HDFC, ICICI Prudential, IDBI, Kotak and SBI are similar - around minus six per cent. It is similar for annualised returns as the NAVs of these schemes have fallen to 12.8-13.2 per cent.
Returns from Reliance Gold ETF and Birla SunLife Gold ETF are different because they are likely to have bought gold at different levels. Given the similarity in returns, investment advisors seldom tell you to choose between gold ETFs.
However, in comparison, the NAVs of gold savings funds are given according to the market price of the ETF. The catch lies there: Whereas the price of gold - the underlying commodity in ETFs - has been falling due to import restrictions and increase in duties, the units of the ETFs are trading at a premium on stock exchanges. As a result, the NAVs of gold savings funds have gone up sharply.
Depending on the variance in the trading value of their respective ETFs, the returns from gold savings funds of different fund houses are higher by five-eight per cent - a difference of a good 300 basis points even amid savings funds.
What should investors do? Investors who have bought units of ETFs might feel aggrieved that they are doing worse than the gold savings funds. It's because if the buyer goes to actually sell the ETF units, he is quite unlikely to get the tradable NAV. This is due to a lack of depth in the market. There are very few participants in the trading of gold ETFs. Most likely, sellers will have to exit at a discount.
Among gold funds, there is a third variant: Gold mining funds. Only two fund houses, Pinebridge and DSP BlackRock, have mining funds and both are doing dismally - having fallen over 40 per cent in the past year. These are fund-of-funds schemes and invest in the equities of mining companies globally.
The lesson: According to industry experts, this sharp difference is not something to be alarmed about due to the negative returns of the schemes. "Also, the outlook on gold is not very positive after the tapering announcement by the Federal Reserve. So, there isn't much of an opportunity that one can take advantage of. If such anomalies arise when gold prices are positive, investors would be able to make a killing," says an analyst. Also, market players say that there is a strong case for the regulator - the Securities and Exchange Board of India - to look into the valuation norms of savings funds. Mispricing between two similar products with the same underlying asset can cause serious problem in future.