Gold exchange traded funds may be a realty in the near future with new amendments to regulations that are gradually giving shape to the final draft for such funds
18-Jan-2007 •Research Desk
The latest news from SEBI will be well received by those who have believed in gold as a lucrative investment class. In January 2006, SEBI increased the asset basket of mutual fund investors by allowing gold exchange traded funds to invest in gold and gold related instruments (instrument having gold as underlying asset). However there remained ambiguity on many contentious issues. The move saw a couple of fund houses filling their draft offer documents with SEBI, however to date none have been approved.
The regulator on December 20, 2006 made amendments to the earlier regulation whereby the gold traded by gold ETFs shall be valued at the AM fixing price of London Bullion Market Association (LBMA) in US dollars per troy ounce for gold having a fineness of 995.0 parts per thousand. The fund can invest in gold of a higher grade and the relevant price on LBMA will be applicable. It has allowed for conversion to metric measures as per standard conversion rates and has also stated that the NAV will be converted to rupees as per the RBI reference rate declared by the Foreign Exchange Dealers Association of India. The recent amendment also takes cognizance of transportation costs, custom duties and other charges that will be incurred in bringing the gold from London to the custodian in arriving at the final price. The amendment further clarified that the metal can be retained only in the form of standard bars which comply with the good delivery norms of the LBMA.
The custodian as stated under the earlier regulations will be banks registered as custodians by the board.
Benchmark Mutual Fund was the first to file a proposal to launch a gold ETF way back in the year 2002. As of now, mutual fund houses that have already filed their draft offer documents and are pending approval will have to re-file these documents.
The overall guidelines to gold ETFs are overdue considering that India is the largest market for the yellow metal. The units of these mutual funds will be traded like shares of companies, unlike the regular funds where the fund house stands ready to repurchase units at a declared NAV.
These funds will offer a cost effective way for small investors to invest in gold. Through these funds, investors can slowly accumulate their gold holdings without having to take possession of the metal and bother about its safekeeping. These instruments will also offer more scope for diversification to individual portfolios.