The popularity of investing in gold can be ascertained by the number of gold saving mutual fund options. Currently, there are 14 gold ETFs and 11 gold savings funds, which collectively manage Rs 16,396 crore as on December 31, 2012. In both these forms of investment the underlying asset is gold in physical form. However, recent changes with respect to import duty and the Sebi regulation will impact investor interest.
First, the government has increased the import duty on gold from the current 4 per cent to 6 per cent. This will increase the import price of gold and impact demand. At another level, it is proposed that gold ETFs be linked with the bank's gold deposit schemes so that the idle physical gold in gold ETFs be used efficiently, reducing the import of gold. In the gold deposit scheme, offered by banks, banks accept gold deposits from clients, which is lent to gems and jewellery trade. At the end of the deposit tenure, one can receive gold in physical form or its equivalent cash value. The impact of this move will help gold ETFs earn additional returns.
Currently, the underlying physical gold in an ETF is kept in vaults with the custodians, for which investors are charged a custodian fee. The changed rule by Sebi allows physical gold in an ETF to be kept with banks as part of the gold deposit scheme. This move will counter the increase in import duty on gold, considering the custodian fee is annually around 0.10-0.40 per cent charged from investors, which in effect will help the ETFs earn an additional 0.75 per cent from the bank.
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