India's SEBI - Securities and Exchange Board of India is about to launce a new Gold ETF

Sebi’s gold exchange traded fund in final stages

MUMBAI, INDIA
Posted online: Friday, December 01, 2006

After a long wait, investors can now hope to buy and sell gold like shares on the stock exchanges. The Securities and Exchange Board of India (Sebi) is in the final stages of clearing Gold Exchange Traded Funds in India, the largest market for the yellow metal in the world.

Though two mutual funds — Benchmark Mutual Fund and UTI Mutual Fund — have already submitted proposals for gold funds in the market, the market regulator took its own time to fine-tune the concept. Many other fund houses, including DSP Merrill Lynch, are also interested incoming out with these funds.

"We are expecting the Sebi to clear these two schemes soon,"says chairman of Association of Mutual Funds of India, AP Kurien. "This instrument would give small investors to accumulate gold in small amount over years and helps them to diversify their portfolio," he said, adding, "as and when he wants to sell, he can either get gold or simply sell the units."

The regulator has amended the Custodian of Securities Act, enabling the custodians of the proposed gold funds to outsource the safekeeping of bullion to outside agencies. But the Sebi has made it clear that the custodians would be responsible to its clients (mutual funds) for safekeeping of the gold kept with other person, including any associated risks.

ETF is a new term for Indian investors. Globally ETFs handle assets worth billions of dollars. There are over 300 ETFs in the US alone. "For Indian investors, it will be a new investment avenue... our investors are familiar with the gold market and its price movements,"said a mutual fund source.

The new fund will track the price of gold. Its appointed custodians will buy and sell gold bullion as investors look at positions in the ETF. The GETF idea was proposed by Finance Minister P.Chidambaram, who proposed in the Union Budget 2005 that Sebi should permit, in consultation with the RBI , mutual funds (MFs) to introduce Gold Exchange Traded Funds (GETFs) with gold as the underlying asset. Such a move would enable any household "to buy and sell gold in units for as little as Rs 100," and these units could be traded in the same manner as MF units, he said.

As the first step, Sebi had recently allowed domestic mutual funds to invest in ETFs abroad. ETF tracks a particular index or sector and seeks to replicate its performance by owning the securities tha to make up the index or sector, no matter how broad or narrow a segment of the market it may be. Thus an ETF may include several dozen or sometimes several hundred or even several thousand securities. As the number of indexes continues to grow, there is an increasing variety of ETFs in which to invest.

The idea of a gold ETF was first officially conceptualised by Benchmark Asset Management Company in India when they filed a proposal with the Sebi in May 2002. It was not launched since it did not receive regulatory approval.

The first gold exchange-traded fund actually launched was in March 2003 on the Australian Stock Exchange under Gold Bullion Securities. India which has gold worth Rs 24 lakh crore is also one of the largest consumers of gold in the world and absorbs around 700 tonne of the world's annual consumption of about 3,200 tonne.