Gold ETFs face custody hurdle

MUMBAI: The gold exchange-traded fund (GETF) faces one last hurdle before its launch in India. The indecision over the custody of the physical gold, to be traded in the form of shares, is causing the delay.

“The guidelines for launching the GETF are close to being finalised. While there is a broad framework, issues on storage of gold have still not been clarified,” AP Kurian, chairman, Association of Mutual Funds of India (AMFI), said on Friday at the sidelines of a seminar. Sebi is expected to administer the product after RBI’s approval.It is not clear, however, whether banks would hold the physical gold directly on behalf of a mutual fund or accept gold warehouse receipts for the fund.

Jignesh Shah, MD, Multi Commodity Exchange, has voiced concern about the hedging of price risks. “Since gold futures are traded on commodity exchanges, those investing in ETF should ideally hedge their price risks on the exchange when the price falls,” he said. MFs are yet awaiting permission to trade on the commodity futures exchanges.

The cost factor is also posing difficulties. Mr Kurian said, “Most of the cost is borne by the investor, as the front manager cannot bear costs. Therefore, the GETF has to be cost efficient.”

He further added that returns were dependent on the price movement. “The gold price does not rise the way indices rise, making the cost component all the more relevant,” he said.

On the liquidity front, Rajan Mehta, executive director, Benchmark Asset Management Company said, “Since the pool of funds would be through authorised participants, I don’t forsee any liquidity problems arising.”Both Benchmark AMC and UTI Mutual Fund are awaiting the regulatory guidelines.