The Hindu Business Line : Exchange Traded Fund returns closely track spot gold

Investment in physical gold is only a shade more profitable than investing in paper gold, that is, units of gold under the Exchange Traded Fund (ETF) route.

The Benchmark Gold BeES, first to make its debut on the National Stock Exchange, generated a return of 16.54 per cent between July 2 and November 16 against a return of 17.01 per cent for ‘spot’ prices of gold during the corresponding period.

UTI Gold Share gave a return of 15.66 per cent during the corresponding period.

Shortfall in returns

But Mr Rajan Mehta, Executive Director, Benchmark Mutual Fund, which has sponsored the Benchmark Gold ETF, argues that a shortfall in returns is no reflection on fund management skills in the industry as the unit returns are net of asset management fees and other expenses, which in their case is one per cent of the value of investments per annum.

Adjusted for such outgo the returns from managing the gold portfolio for the same period work out to 16.91 per cent, which is not significantly lower than the returns from spot gold, Mr Mehta argued.

He also stated that it would be more appropriate to measure returns on the basis of movement in the Fund’s NAV. However, in the short-run, investors have only the stock exchange traded price for cashing in on their investments thus, rendering the NAV as only of academic importance.

Mr Mehta added that despite the spot returns being higher than the ETF returns, there is a benefit for the retail investor to adopt the ETF route for investment in gold.

Buying & selling

Purchase of small quantities of gold by a retail investor in the spot market commands payment of premium up to 10 per cent, and thus, the return may not always be optimum, he said. Whereas he can purchase even a solitary unit on the exchange for same price as any other investor.

The same is true when the gold is sold, as the investor will only be able to sell the product at a discount to the ruling market price. Of course, returns look more attractive at 21.5 per cent when measured in dollar terms assuming that an India investor is in a position to buy in the London spot market.

As the domestic market mirrors the London prices for gold, its value in rupee terms, would incorporate the latest rupee-dollar exchange rate. The rupee appreciation against the dollar has knocked off 3.3 per cent of the gains measured in dollar terms.

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