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Concepts & Tutorials

Benchmark Gold ETF New Fund Offer

Benchmark fund is launching a Gold Exchange Traded Fund (ETF) from Feb 15 to Feb 23, 2007. Read the Offer Document and a set of Frequently Asked Questions – a very informative set provided by the fund house.

If you don’t know what ETFs are, click here.

What’s a Gold ETF?
You might have heard of Investments in Gold. Buying Gold has traditionally (in India) seen as a “safe” investment, and is known to appreciate regardless of inflation. In fact gold is rated so highly that it is the last possession that a family will sell – in local parlance, if a family is selling gold, it is thought to be in dire straits.

Gold can be bought from your local jeweller, and is given a value depending on the purity of the gold. In fact, banks also offer “pure” certified gold bars and coins for long term storage. Being traded daily on national and international markets, Gold has a transparent value that you can see on most business sites or exchanges.

Physical gold
If you buy gold and keep it in your house, you have a problem. Gold is expensive for its weight. A kilogram of gold – that’s as heavy as one litre of milk – costs Rs. 9.5 lakhs today. So if you bought 10 grams, for about Rs.9,500, you will have to now deal with an object around the weight of a five rupee coin but costs a heck of a lot more.

To avoid theft you have to get yourself a locker or a metal safe which costs more money.

Another problem is purity. A jeweller may tell you a bar is 22 carat or 24 carat, but it may not be so. You can take the same gold to 10 jewellers and they will give you different opinions on its purity. And it’s worse with jewellery. Jewellery usually moulded because pure gold by nature is too soft. In fact Jewellery is not as valuable as gold bars or coins for that reason.

You may also choose to buy from a bank, which will give you a certificate of purity. Unfortunately while banks will sell you gold, they won’t buy it back. And that purity certificate, when given to someone who will buy the gold (like a jeweller), is as good as toilet paper.

Of course, there are also “making charges”. Jewellery costs the most for making – and from what I know, the jewellery industry makes its biggest margins here. Even gold bars and coins have making charges.

And finally there is arbitrage. The jewellers or banks charge you a rate that is usually a premium on the market gold rate (or a discount when selling).

The Benchmark Gold ETF serves to solve these problems. Imagine this as saying: I will give Benchmark mutual fund some money, they will buy gold, they will store it safely, they will not have any making charges and the price will be very transparent and at market rates. The mutual fund then issues me units for my money.

Further, as an ETF, you can buy units and keep them in your demat account. That means you can buy or sell online.

Benchmark Gold ETF new fund offer
The ETF starts off with a new fund offer (NFO) – you can invest in the NFO with as less as Rs. 10,000. The ETF will issue units that are equivalent to 1 gram of gold. (for a price of Rs. 950 per gram, each unit will be Rs. 950) The fund management charges are pegged to a maximum of 1% per annum, a very low value.

But should you invest in the NFO? The short answer is no, don’t buy the NFO, but buy this fund after it lists on the exchange. Because of two factors.

One, there is an entry load for the NFO – 1.5% for under 50 lakhs. After listing, there is no load.

And two, the NFO expenses can be as high as 6%, and this is an open ended scheme so the funds allocated will be 6% lower (or the expense ratio). This cannot be amortised, so they will hit the NFO investors as an additional load.

That means if you invest in the NFO, you’ll get units for about 7.5% less than you pay – for every Rs. 10,000 you put in, you will get units worth only Rs. 92,500. The fund probably recognises that this makes little sense, that’s why the NFO period is only nine days – so I expect that issue expenses will not be very high.

I would have recommended this NFO, if it were not for the loads – but I whole heartedly recommend purchase after the fund is listed on the exchange.

Investing in Gold is an alternative to equities, and carries different risks. But investing in gold has had problems that I’ve listed earlier – now, it’s a lot easier and transparent. A friend on an online group mentioned that this is a way he looks to hedge against gold prices rising, so that at a later date, he can purchase physical gold to make jewellery for his family. You may have different reasons to buy or own gold, but if it’s for price appreciation you might want to buy this ETF instead.

Note: You must have a demat account to purchase or sell this fund, NFO or otherwise.

  • Anonymous says:

    >Hi Deepak,
    I am a new visitor to yuor blog. I started last week only. I enjoyed reading your articles and learnt a lot from them. They are good and useful, no doubts about it. I did not see any on the insurance of accident, TPD, and criticle illness. Would you please care to express your views about the above to help us all?. Thanks, Anoop

  • Deepak Shenoy says:

    >Thanks for you comments Anoop, highly appreciated! I will try and write more on general insurance too in later posts.

  • FlatFoot says:

    >Deepak,

    Keep up the good work on covering new investment products.

    I wanted to point out couple of things before people go out and invest in Gold ETF. The ETF is coming out now for the same reasons that property IPOs are coming out of woodwork 🙂 – the asset class has been performing extremely well recently. Obviously one will do well to consider one’s reasons for investing before jumping with both feet.

    Check Gold as investing Wikipedia entry (http://en.wikipedia.org/wiki/Gold_as_an_investment)
    especially the table on Gold prices through years.

    Gold is an asset for the very patient. It has not reached the peak it had last reached in 1980.

    The value of gold investing comes from its being negatively co-related to equities. In the 1970s when the US equities were down, Gold had a massive run. So yes, it might have a place in portfolio for diversification reasons but take a good look at the table before you take the plunge.

    Regards,
    Ravi

  • Deepak Shenoy says:

    >Ravi:Very good points. Of course one could say that in the last three years, equity and gold have moved the same way – upwards. But in general gold is a hedge against dropping of other assets, and not necessarily a good long term investment!

  • Ramesh says:

    >Hi Deepak,

    How can i buy this Gold ETF fund? is it possible throught the ICICI trading account online?
    Or is there any other broker support this thru online?

    thanks,
    Ramesh

  • Vivek Venugopalan says:

    >Deepak,
    I just read your blog entry from a referrer link. Looks like we are both talking about the same topic now – Gold ETFs. Maybe we should collaborate

  • Sathya says:

    >Hei Deepak,

    You are actually doing a great job by advicing lots of us.

    I am a novice here and have a quick silly question w.r.t GETF; when I sell the units I have purchased through demat, will I get returns in Gold or money from Benchmark? how does it work?

  • Deepak Shenoy says:

    >Sathya: Thanks! And for your question, when you sell your demat units you’ll get money, not gold.

  • Praveen says:

    >Hi Deepak and all,

    I totally agree that Gold ETF should be bought on listing. A portfolio of gold investment can be made by systemetic investment everymonth on the stock exchange. This way we can buy at all price points and add gold to the portfolio in a transparent way

    Praveen

  • Anonymous says:

    >Deepak,
    I like your blog for a clear analysis of various investment options.
    What do you think about the optimix funds ?
    http://www.rediff.com/money/2007/mar/01perfin2.htm

    Naveen

  • Deepak Shenoy says:

    >Naveen, thanks for that. I’m not fond of Fund of Funds (FoF) schemes because I don’t understand the nature of these funds. You buy a fund so a manager can invest on your behalf. An FoF takes your money and gives it to different managers – which is a no-brainer because you can do that yourself!

    There are certain problems with FoF schemes – firstly they don’t give you the tax freedom (equity funds have zero long term capital gains, but non equity funds, whihc is how FoFs are classified, are taxed on LTCG at 10%)

    Second, you don’t know if you are paying entry loads two times, first when you buy the FoF, and then when the FoF buys the underlying fund.

    Third, these funds are way too new to elicit interest. Lets see if they do better than say a balanced or large cap equity fund, after three years of existence.

  • Anonymous says:

    >Dear Deepak

    i know that this post is old, but i wanted some clarifications on the same subject. hope you can read this msg.

    my background:
    i am looking to buy Gold for my daughter's future marriage in distant future, was looking to buy GOld ETF from icicidirect because
    1. i do not have a locker
    2. did not want to make monthly trips dealers ( even to reputed shops like png, tanishq to buy gold)
    3. i am doing monthly SIP in MF and stocks and i know the advantages of monthly buying)

    what is coming out from discussion from some sites is that if you buy gold etf for 20 years, because of the expense ratio and annual charges, the actual money you could get after 20 years is only 72 % of the total paid. is this correct ?

    assuming that you buy one gram of gold each month and after 20 years and 240 grams of gold, when you sell it at end of 20 years, the expence and annual charges ( say 2.5 % ) will eat almost 18 % of your gold ?
    is this true ??
    i am not able to understand how this will happen.

    looking forward to your reply

    regards
    Harrypotter

  • Anonymous says:

    >Dear Deepak
    if my name has appeared by mismatch, plz do not publish my email id or my name in the comments.
    i would like to be known as harrypotter

  • Anonymous says:

    >Continuing from previous post just wanted to add
    this SIP gold is specially for my daughters marriage. i have SIPs for other requirements.

    regards

    harrypotter

  • Deepak Shenoy says:

    >harry potter: Gold ETFs are about 1% on expense ratios. Plus you save on locker charges. You also save on the upfront gold charges (the shops will charge a premium on the gold purchase) and any quality issues.

    One might say you will incur the cost anyway when you eventually purchase but:
    1) The "premium" is lower if you buy gold to make jewellery, or directly buy a set.
    2) Your daughter may not want gold – she may decide she could use the money better to do something else, like buy a house, travel the world with her husband etc. Then you don't need to convert.

    Premiums are of the order of 10% at the jewellers for gold coins. Lesser at unbranded jewellers but then you have quality issues.

    With a 1% cost, you will have paid about 10% of your money over 20 years to maintain the ETF, assuming ETF charges don't go down. Lockers, quality and premium issues, and the hassle of actually transacting physically should be considered in comparison.

  • niveditha says:

    >Hi, Very informative post.I have a demat account from icicidirect. I can see the buy option for equities only.From where should i buy the gold ETFs. And also which is the best Gold ETF in the market as of now.
    Thanks in advance

  • Anonymous says:

    >Hii Deepak,

    According to u,is it good to invest in gold etf than to buy gold??at last,what we will get,money or gold??how long is the investment period??if u r replying,it will be more good to me………..