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.

Gold funds in India - Unanswered questions

With the Indian government appoving gold based mutual fund schemes, there is obviously a rush by various mutual fund companies to start Gold funds and Gold ETFs in India. Knowing Indian and their love for gold, this could be a huge success story for the fund houses. There are still a few questions that I don't have an answer for today but it would be good to know.

1. What is the tax implication for buying gold? Do we get tax rebates for buying a gold MF?
2. Would a gold MF be treated as an equity MF or a debt MF with associated tax implications?
3. When I sell my holding in the fund, do I have any extra exit loads because of liquidity risks?
4. Will the price of the fund ever differ from the gold price? Considering this is more liquid than physical gold and traded mostly electronically, I would imagine that such advantages should allow the price of the fund to be at a premium to actual gold. Would this be the case?

So many unaswered questions in my mind. Any prudent reader would point out that we never asked such questions when we bought and sold gold so why now? The answer is that by bringing a structured investment tool, I would like to peg my risk level to that of buying and holding gold while leveraging the capabilities that a financial instrument can give me. Hence the questions.

You can always buy gold in T.Nagar... that institution would exist as long as Indians abound!