Wednesday, February 22, 2012

Product differentiation is not significant

The gold fever, which caught on last year, seems to be a rage still. Though prices have tapered a little — returns from gold exchange-traded funds were down 3.5 per cent in the last three months — enthusiasm hasn't ebbed. The euphoria then is justified, as the yellow metal returned 35.59 per cent in the last one year.
Motilal Oswal Mutual's New Fund Offer (NFO) plans to tap this trend. But, the product has been tweaked slightly — investors can redeem units of gold (minimum ten grammes) directly from the fund house and get an equivalent amount of physical metal, quite similar to the National Spot Exchange that allows this through its e-series.

However, unlike banks or jewellers, who charge a premium on physical gold, the product will price the units based on the Indian spot price of the metal. In addition, there will be a value-added tax.

The minimum investment amount during the NFO will be Rs 10,000. The expense ratio would be up to 1.3 per cent at the moment, said Rajnish Rastogi, senior VP and co-head of equities at Motilal Oswal Mutual Fund, which is in line with the other gold ETF schemes — eleven at present — that charge between one and 1.5 per cent.

The units of the scheme will be listed both on the NSE and BSE. Investors can buy or sell the units through their trading accounts with their brokers or sub-brokers at the price quoted on stock exchanges. "When you want to redeem units, you will have to approach the fund house, furnish your PAN card details and another identity proof such as driver's licence or voter's ID. It will take T+5 days to receive your gold units after putting in your request for redemption", said Rastogi.

There is no entry or exit load applicable. Since all gold ETFs give similar returns, there won't be much difference in these. The only innovation - being able to buy gold cheaper than banks or jewellers - isn't a great differentiator. But, the cost difference — five to 15 per cent — can make it beneficial for the long-term saver.

Typically, it can be used by people who want to save for their children's wedding few years down the line. A 10-15 per cent savings could be significant then.

This is like a monthly savings scheme that many jewellers such as Tanishq have, where investors can pay monthly and buy jewellery at the end of the tenure. Some jewellers even pay one or two instalments. MOSt's gold ETF can be used to save gold over a longer term and then use it for making jewellery. However, as Hemant Rustagi, CEO, Wiseinvest Advisors, puts it, "The usual expenses will have to be incurred once the physical gold is given to the jeweller. Any saving, therefore, is only interim in nature."

As for taxation, there will be none on redemption in the physical format. But if you sell the gold within three years, you will be levied a short-term capital gains tax in which the gains will be added to income and taxed according to your slab. And, if it is sold after three years, you can index the cost and long-term capital gains tax of 20 per cent. However, if you use it as any other gold ETF, the tax will be similar to debt instruments.

Since the advantages of the conversion to the physical format are not significant, treat this scheme like any other ETF.

The NFO for the scheme will open on March 2 and will close on March 16.


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