Gold fund investors book profits

High yellow metal prices trigger redemption in ETFs

New highs in gold prices are leading to net redemption in gold exchange-traded funds (ETFs) even as investors are increasingly looking at this category for diversification of their portfolios.

With the listing of Reliance gold ETF on the National Stock Exchange (NSE) yesterday, four fund houses (Benchmark, UTI Mutual Fund and Kotak Mutual Fund being the other three) currently offer gold ETFs to Indian investors. Their assets under management (AUM) under gold ETFs is estimated at about Rs 500 crore.

Industry officials said UTI Mutual Fund had seen redemption of Rs 5.63 crore in November, while Kotak MF had witnessed redemption for Rs 5.14 crore in the same period. Benchmark executives did not disclose the redemption figures, adding that they would clear only by the end of the month.

Gold ETFs are open-ended mutual fund schemes that invest the money collected from investors in standard gold bullion (0.995 purity).

Investors' holding is denoted in units, which get listed on a stock exchange. These are passively managed funds and are designed to provide returns that would closely track the returns from physical gold in the spot market.

Though Kotak's gold ETF has added Rs 10 crore in the last 2-3 months, new highs in gold prices are leading to some redemption now.

"Gold prices have created new highs at the $800 level. But if gold continues to remain at this price for some more time, investors will begin to put in money into the gold ETF once again," said Ritesh Jain, a fund manager of Kotak gold ETF.

UTI Mutual Fund's Goldshare had AUM of Rs 142 crore as of November 27.

Industry observers feel gold ETFs are picking up slowly. An indication of this is the fact that the latest entrant, Reliance Mutual Fund's gold ETF, managed to mop up Rs 146 crore in its new fund offering. The fund got listed on November 26.

Units of the fund were allotted at Rs 1,017.83 a unit. The first net asset value (NAV) of the unit was Rs 1,026.32, a premium of 0.83 per cent.

Units of the ETF traded at Rs 1,069 on the first day, a premium of 5 per cent to the allotment price. Subsequently, the price has dropped and units closed at Rs 1,021.94 a unit.

Analysts say investors can sell units on the listing day since there is no exit load. They also add that the gap of some days before the ETF gets listed on the exchange may result in some deviation in the price since gold prices may show some difference in the interim. The brokerage on trading of units in ETFs is less than 1 per cent.

"The listing day price is close to the NAV of 1 gram of gold (arrived according to the Sebi-approved formula). There could be some deviation in the price because of supply-demand factors. However, the premium or discount does not go beyond 1 to 3 per cent," said R Raja, senior VP, UTI Mutual Fund.

The price of gold ETFs depends on the price of the underlying commodity, gold in this case. Unlike a mutual fund, there is no real feature that distinguishes one gold ETF from the other.

"The pedigree of the fund house and the fact that units are actively traded are important factors," feels Rajan Mehta, the executive director of Benchmark Mutual Fund.

The fund house was among the first to launch a gold ETF. Most fund managers feel that a "huge, well-diversified base" is important for gold ETFs to take off and there is still some time for the asset class to get popular.

Expenses, including custodian charges (40 to 50 basis points) and insurance charges, should come down for ETFs to take off. The fact that investors needed demat accounts to invest in ETFs had also not helped in their popularity, added Raja.

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CASHING IN

UTI Mutual Fund has seen redemption of Rs 5.63 crore in November

Kotak MF has witnessed a redemption of Rs 5.14 crore in the same period

Gold ETFs are picking up with an AUM of Rs 500 crore