Gold ETF and Gold Mutual funds: Must you invest?
For somebody who has spent a long time watching the mutual fund industry I am not sure whether it is going to be a case of “I knew this will happen” or even worse ‘I told you so’….
How does a fund scheme get launched – rather why? Simply because the sales force has never been trained. The only way distributors (all shapes and sizes) could sell was by saying ‘Here is an NFO, available AT PAR…so buy it’. What was unsaid was ‘I get 4% commission, an ad in my newsletter and a trip to South Africa’. The CEO was happy to go to the press and say ‘We collected X amount of money’. And there was a booze party and everybody was happy.
Some fund houses resisted launching schemes just because others were launching, but some succumbed. Hdfc and Templeton are two fund houses who resist temptation for a long time. However they too succumb. Templeton was perhaps the last fund house to launch a ‘Technology’ fund, Hdfc launched an ‘Infrastructure’ fund – giving up their avowed principle of ‘NO focused /thematic funds’.
Why is everybody launching a Gold fund? Easy to get SEBI approval. Not too many questions – imagine launching a ‘Value’ fund. Not many fund managers understand what such funds are supposed to do – and VERY difficult to explain in the prospectus. Also it is the flavor of the month – and easy to tackle pressure from the sales guys – ‘We do not have a gold fund – only that sells in this market’.
More importantly all these funds are EXPENSIVE – you pay 2.5% as costs for holding GOLD. This is plunder. Historically gold gives about 8% return – and if you pay 33% of your TOTAL EARNING as charges, I would love to be an amc shareholder 🙂 rather than an unit holder. So Gold is really Gold for the amc. And as prices keep going up, you make more money by doing nothing.
Mr. Sinor we need about 42 schemes in Gold so that distributors can mis-sell. And then we can crib about the distributors. Fund houses which already have / are launching a Gold scheme are: Kotak, Uti, Benchmark, Reliance, Quantum, SBI, Axis, Tata (of course!!), DSP Blackrock, Birla, I Pru, Hdfc…..30 more to go. Quite a joke.
They perhaps give into sales pressure and do launch it. Historically when all fund houses finish launching the sector crashes or at least starts giving bad returns. I remember seeing 2-3 corrupt / incompetent fund managers plundering their Tech portfolios – for obvious reasons I cannot name them. At least in Gold these fund managers (Oh…they are still around and in very senior positions)..cannot plunder the schemes except by charging 2.5%.
All that glitters may not be gold. I need to finish this post soon – somebody is calling me for a concall on GOLD :). What a coincidence 🙂 🙂
http://blogs.forbes.com/greatspeculations/2010/07/23/gold-etfs-and-the-manipulation-game/
Hemant
Subra
Other than SBI (1.7%) all AMC’s are charging 1% as expense ratio.
Am I missing something 🙁
KalpK
AS you have raised issue of gold funds, do you suggest gold ETF instead of buying physical gold? can we suggest buying the ETFs to the women in the house who regularly buy gold for sons and daughters marriages in the future? as far as charges are concerned, even the jwellers buy and sell at different rates.
subra
I am right now s*h** scared of gold. Look at the bull run that has been happening for the past 8 years. Normally such a bull run attracts all kinds of jokers. The biggest risk today in the world comes from Obama, Goldman Sachs and the kind. In the US there are synthetic ETFs – surely the second grade and 3rd grade custodians are sitting on some metal which looks like gold. Though the Indian situation is not so bad, when the bad news hits gold will dive…and dive deep. Can it go to $ 5000 before the bad news hits? Sure.
I am not a buyer (against my conviction) nor a seller (not sure how much more time before a gold scam hits)
to answer your question the most efficient way of buying gold is perhaps thru the Commodity exchange and hold in demat form. No need for even an etf if you are accumulating for your daughter’s wedding.
pravin
well.you if believe GATA, it is the US Fed that is manipulating gold.it regularly intervenes in swap markets. gold in its physical form is the only way of avoiding third party trouble.
no wonder the US Fed is against getting audited. it is a sham(e) that these low minded academics can get away with theft in the name of “independence of the central bank”. yeah right.that train has left the station
Sanjay Singhaniya
How do they recover the cost? Do they sell part of my units so that my unit holding will decrease or do they sell the gold keeping unit holding so that gold per unit decreases?
Sanjay Singhaniya
How does ETF management recover management expenses?
How does it work for gold ETF? If expense ratio is 1% does it mean that management sell 1% gold holding every year? I am not able to see any other way. More specifically, if I had bought a gold ETF of 1 gram 5 years back and the expense ratio is 1% then should the value of the unit be .95 gram gold at this time?
sunny
As AP(Authorised Participant) buys physical Gold the price of Gold will increase. Similarly as he sells fresh ETF units in the market, the supply of ETFs will increase.
These two actions will lead to increase in Gold prices and reduction in ETF prices, thereby removing the anomaly in the prices of the ETF units and the underlying.
Similarly, if ETF prices fall way below the price of Gold, APs will buy ETF units cheap and redeem them in Creation Unit lot size. Such an action will reduce supply of ETFs from the market and increase the supply of physical Gold (Gold held with Custodian will come into the market). Both these actions will help align prices of underlying and ETF units as ETF prices will increase due to
buying (and subsequent cutting of supply) and price of physical Gold will reduce due to fresh supply in the market.
I couldnt understadn the second paragraph, why can there be any anamoly when gold ETF prices are aligned with Gold … and why AP’s should come into picture?