Sunday, February 11, 2007

Gold Funds - an update

Deciding to dig deeper into Gold funds, I read the offer document for the benchmark AMC offering called the Gold BeES (pdf file) and here are some of the key points that understood by reading this document. Again, I am exploring here and not speaking from experience or expertise

  1. Their offering is an ETF meaning - it will be traded on the stock exchange (NSE) after the new fund offer (NFO) period (between February 15 and 23rd, 2007) like any other stock.
  2. The "face value" is Rs. 100/- for 1 gram of gold and today's market price (say Rs 860/gm) would mean that the units are sold at a "premium" over the FV of Rs 760/-
  3. You can buy and sell the units of the MF on the exchange and you can also choose to get physical delivery of the gold or decide to deposit gold to obtain units (no details on how the logistics will work here)
  4. Fees:Investment management fees is 1.25% p.a. of the weekly average net assets outstanding for amounts up to Rs.100 Crores and 1.00% p.a. of the weekly average net assets outstanding for amounts above Rs. 100 Crores. There is no entry/exit load post listing for the fund but you will end up paying brokerage since these transactions are treated as stock. During NFO, the entry load is 1.5% upto 50L of investment
  5. The custodian (person responsible for managing the physical gold) is The Bank of Nova Scotia
  6. The scheme will have 90%-100% of their portfolio in physical gold and 0%-10% in Money Market instruments, Securitised Debts, Bonds and cash
  7. NAV : NAV will be calculated like any other mutual fund and will include all the expenses of the AMC. But they have the concept of a "creation unit" which represents 1000 units plus some cash component which is equivalent to apparently 1KG of gold. This creation unit applies only when you exchange physical gold for the Bees units. This is a facility available only to authorized participants (how are they determined? I dont have a clue!). So when an authorized participant reedems one creation unit he receives 1 KG of gold. I did'nt quite understand their example of buying creation units by depositing gold on Pg 26 (why did the assumption of price of gold drop to 850 from 860?). If someone can figure it out, let me know.
  8. You can pledge these units similar to the loan against shares schemes.
  9. Tax : This fund will be treated as a mutual fund other than equity which means that it will not get the benefit of short term (10%) and long term (0%) tax rates.

Well thats all for now folks. Please add your comments if you found more information.


Deepak Shenoy said...

vivek, good stuff - saw your comment on my blog too, and yes, we should collaborate!

Some points:
1) Authorised participants are market makers who enroll with the fund. Since they have to have a kg of gold to be an AP, that's about 9 lakhs per transaction, and the market maker gets the arbitrage (between the NAV and the market price). Btw, it's not just APs who can deal with the fund directly - any large investor can.

2) There is also NFO expenses which are likely to be low but will hit the number of units allocated if the NFO is subscribed to (rather than buying on the exchange)

3) Tax: This is a non equity mutual fund, so will be treated as long term = 10% and short term = added to your income. Only benefit is: if you buy real gold, long term is after three years. Gold ETF wise long term is after one year.

Vivek Venugopalan said...

Deepak, thanks for the pointers. that does clarify some of my doubts on authorized participants. What would be interesting is that whether the NFO expenses would be greater than the arbitrage opportunity offered by the fund so that is is attractive for the market makers (or maybe that is a catch-22 they will make it attractive by keeping the initial arbitrage high enough to cover costs so it is worth buying the NFO?)

Anonymous said...

Hi Vivek,
I like the title of your blog and all the disclaimers. Makes me smile. Warm regards to you and your family. I certainly hope no one would dare blame or credit you with any action that they took or did not take because of what was written in this blog.

I am new to gold. In fact I am new to the concept of real money versus fiat currency. In my recent crossing of the threshold into this glittering (and grimy because of what I perceive as a gangster element that manipulates the gold market) world I have come to understand that there are people in the world who are most interested in physical possession, that derivatives or certificates that indicate that someone else is holding it for one isn’t really good enough. Maybe it was Marc Faber who impressed this on me the most. He speaks of a “Gold Road” (analogous to the Silk Road) from UAE(Dubai) to India and throughout Asia.

I was struck by your comment that “no details on how the logistics will work here”, as it pertains to taking physical possession. I think that would be very important otherwise it just seems like a carrot on stick meant to lure someone into investing.

I haven’t done a search of your previous blog posts so I’m not sure if you’ve already shared your thoughts regarding the dinar gold coin and the dirham silver coin. Apparently this historical money is being minted. Seems to me coins are easier to handle than bricks of bullion.

There are at least a couple of institutions that are selling dirhams and dinars ( , )
You buy and they hold them and you can pick them up and/or you can pay annual storage fees. Although I saw no “details” on their sites…I don’t see what detail is needed if you simply go and pick them up.

Perhaps this is the case with the fund that you speak of? I just saw a movie the other day called the Pirates of Silicon Valley ( ). It was just a movie however I believe that it spoke of a culture of dishonesty and deceit. You know the expression, “Never give a sucker and even break.” It’s a common expression here in the USA where I am at the moment. What a degrading and base position to have in one’s mind and to actually practice. My point is that I very much support anyone’s gut instinct, or historical experience, that would make them want to have physical gold.

I include these links also for reference.
Where gold is “produced” ( )
An article speaking to the emergence of the dinar and dirham:
I look forward to reading more, understanding more.


P.S. Please pardon any typograhical errors. This was not meant to be incomprehensible or offensive to anyone.