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MF Industry Eyes Gold FoFs

Investors won't require demat accounts to invest in gold fund of funds (FOFs), but there is uncertainty over their launch

If these three gold FoFs see the light of the day, as the fund houses behind them have filed offer documents with the Securities and Exchange Board of India (SEBI), investors who were wary of opening Demat accounts to invest in gold exchange traded funds (ETFs) might not have to do so at all.

To make investments in gold ETFs, an investor has to go through a stock broker, as they are listed on an exchange. To top it all, investors also have to open a Demat account that allows them to invest in them. If these three gold FOFs get the market regualtor’s stamp of approval, investors can purchase them like any other mutual fund.

As of now, there are no gold FoFs, but three of them, Benchmark, Reliance and UTI, latest to do so being Benchmark, have filed offer documents.

The offer document states that Benchmark Gold FoF would invest up to 100 per cent in Gold Benchmark ETF and up to 10 per cent in debt securities. On the other hand, Reliance Gold Savings FoF would invest up to 100 per cent in any Gold ETFs and up to 10 per cent in debt securities, while UTI Master Gold FoF would invest up to 100 per cent in domestic Gold ETFs and up to 35 per cent in money market instruments.

Presently, there are six gold ETFs which are listed on the exchanges. The oldest gold ETF - Gold Benchmark ETF - was launched way back in 2007. However since then, there have been five more additions in the gold ETF universe taking the number to six in all. However, their total assets amount to a meagre Rs 1,321 crore as per the latest data.

However, since December, 2007, when total assets were just around Rs 447 crore, gold ETFs have come a long way as their assets have surged 182.6 per cent. Just the year 2009 saw their assets jump 85.96 per cent. In fact, the previous year witnessed the maximum inflow of Rs 482 crore. Out of the total of six gold ETFs, all have managed over 25 per cent one-year returns. This jump in investment is happening even though many investors opted not to invest in gold ETFs due to being wary of opening a Demat account.

However, a couple of aspects need to be kept in mind. Apart from Benchmark Gold FoF, which filed its offer document in December, 2009, the other FOFs had filed their offer documents in May, 2009, but they are yet to be launched. Secondly, gold ETFs, which closely track the price of gold, apart from bearing its expenses, also has to bear the expense of another fund. For this reason, investment expenses of investors might shoot up.