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Foundations

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.

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