Yes, the increasing price of gold continues to attract many buyers and investors. But did you know that gold has in fact gained just 8.9% on a compounded annual basis since 1991? And don’t be foolish to believe that the price will continue to rise always
IDBI Mutual Fund has announced the launch of a gold ETF fund, the latest to enter this segment after a series of ETFs launched recently by HDFC, ICICI and Birla Sun Life mutual funds.
IDBI Gold ETF is an open-ended gold exchange traded fund, like any other gold ETF, and there is nothing novel or different about it from the already existing gold ETFs.
A gold ETF is a paper asset designed to track the gold price without holding physical gold. But is gold a good asset to buy today? Nobody really knows. The price of the yellow metal has already jumped about six times over the past ten years, from $250 to around $1,500 and it may continue to rise or go down, depending on which way interest rates go.
Jumping into any asset that has already increased in value many times over does not make any sense, irrespective of the fact that it could head further up. The best investments are those that are available at a low price, are not very hot, and have started an uptrend, and not when they are already hot and you consider investing in anticipation that it would rise further.
Indians believe that the price of gold (as that of real estate) is always increasing. This is true. But let that not lead to blind belief. If you don't know by how much the price of gold has gone up over the past 20 years, or why, it would be blind to believe that it is going to continue to go up endlessly. It is a common belief that gold offers good returns over the long term. Again, not true. Since 1991, gold is up just 8.9% on a compounded annual basis. That hardly beats a recurring deposit scheme!
Gold is not an investment, but a speculative asset, influenced mainly by the dollar and US interest rates. If you invest in gold, you cannot be passive about it, expecting a rise year after year. Gold does well only in certain market conditions, that is, when real interest in the US is negative to zero. This has been the situation for a decade now and nobody knows how long it will continue. If it does, gold will rise further.
There are only speculative forces pushing up the price of gold, something that is beyond the grasp of an average saver. And I this is so, there is simply no logic in investing in gold. Of course, there is speculative merit aplenty, as long as you know when to pass it on to the next sucker.
The IDBI ETF will invest 95% to 100% of assets in gold and gold-related instruments with a medium-risk profile. On the other side, it would allocate up to 5% of assets in debt and money market instruments with low- to medium-risk profile.
The new fund offer price is Rs100 for cash at a premium equivalent to the difference between the allotment price and face value of Rs100. The allotment price would be approximately equal to the price of one gram of gold.
The scheme will be managed by Gautam Kaul and it will be benchmarked against the domestic price of physical gold.
The proposed fee (Rs100-Rs150 on investments above Rs10,000) might be too little to help agents—who find peddling ULIPs more lucrative
The Securities and Exchange Board of India (SEBI) plans to impose a transaction fee of Rs100-Rs150 on investments above Rs10,000 in mutual funds to incentivise brokers to sell schemes to investors. This transaction fee is another form of entry load which was banned by the earlier SEBI chief CB Bhave in August 2009. Since then there has been an exodus of nearly Rs20,000 crore from equity funds and a decline of nearly 22 lakh equity-oriented mutual fund accounts.
But could the ban on entry load be a major cause of such a huge outflow? For sure, there have been other factors which led investors to exit from participating in the market. Among some of the other factors that deter retail investors from putting money in the markets are the unexplained volatility in the market, manipulation of IPOs (initial public offerings), poor performance of 40% of funds, several counts of mis-selling, lethargic complaint redressal and lack of financial awareness.
A majority of the population, therefore, finds it safer to keep cash lying in savings accounts or fixed deposits. In 1990-91, 32% of household savings was invested in bank deposits. Now that figure has climbed to 51%.
The regulator has failed to look into the other factors for poor retail participation. Without adequate research, survey or discussions with investors, is SEBI making the same mistake all over again?
The entry load for mutual funds was banned in order to make it fairer. "The investor is more important to the market than the distributor," said Mr Bhave at the announcement of the ban on entry loads. This decision never went down well with the fund industry. Distributors found fund-selling unviable and have been moving out of the business. The penetration of mutual funds is so poor that brokers had little incentive to sell mutual funds. The zero entry load was not motivating enough either for the investor to go in for mutual funds on their own.
SEBI chairman UK Sinha said that the transaction fee paid to distributors would help mutual funds penetrate the retail segment in smaller towns. But would it benefit agents, who, after the ban on entry load, opted for selling products like ULIPs (unit-linked insurance plans) which earned themselves higher commissions? The commission earned on ULIPs is still much higher than the measly Rs100, so will agents actively push mutual funds to customers? Investment in ULIPs start at around Rs10,000, therefore a customer having the finance would be pushed by the agent to go for a ULIP where "he will get a life insurance benefit as well".
This would earn the agent a higher commission and would defeat the purpose of the transaction fee planned to be introduced by the SEBI chief.
What about agents who don't sell ULIPs? During the time of entry load, there were numerous cases of distributor's hard selling mutual funds to hapless investors. The transaction fee may lead to the same practice distributors were following earlier.
The other changes SEBI has proposed-like simplifying the IPO form and providing a new format for opening a trading account that will require the investor to make only a single signature compared to the 50-odd signatures earlier, will allow investors to participate with ease. However, SEBI has overlooked the main problem of getting investors to participate in the market.
Market regulator wants funds to give investors reliable and more information about available schemes, performance and investments. Introduces due diligence for distributors, agents
Mumbai: The Securities and Exchange Board of India (SEBI) has asked mutual funds to bring in more transparency in their dealings with investors and agents, while allowing them to charge a fresh transaction fee.
At a board meeting on Thursday, the market regulator heeded the long-pending request of mutual funds to help them contain the losses suffered due to the abolition of entry charge on investors.
SEBI also allowed them to manage and advise pooled assets, such as offshore funds and pension funds, provided there was no conflict of interest due to a differential fee structure.
However, the regulator asked the industry to become more transparent in the information given to investors through advertisements and other channels, PTI reports.
"Guidelines for advertisements will be suitably modified to include point-to-point return on a standard investment of Rs10,000 and other performance-related disclosures."
Besides, mutual funds would be required to give more granular disclosure of their assets under management (AUM) figures, giving the break-up of debt/equity/balanced and also geography-wise disclosures.
"The scheme's performance will have to be disclosed against the Sensex or Nifty, or Government of India debt paper, in addition to benchmark of the scheme. The performance of fund managers across all schemes managed by the same fund manager will have to be disclosed," SEBI said.
SEBI also took the first steps towards regulating mutual fund distributors or agents. "Selected distributors will be regulated through asset management companies (AMCs) by putting in place the due diligence process to be conducted by AMCs," it said.
The due diligence process will be initially applicable for those distributors having multiple-point presence in more than 20 locations, having raised assets of over Rs100 crore across the industry from non-institutional investors and high networth individuals (HNIs).
The distributors, having received the commission of over Rs1 crore per annum across industry, and of over Rs50 lakh from a single mutual fund, would also be covered in the initial phase. "It is estimated that this measure will cover distributors handling about half of the total AUM in the industry," SEBI said.
It also asked mutual funds to disclose the commissions paid to distributors and said that the mutual fund industry body AMFI would disclose the aggregate amount of commissions paid to such distributors by the industry.
SEBI said all operations of a mutual fund would be required to be located in India. "All the operations of a mutual fund, including trading desks, unit holder servicing, and investment operations shall be based in India."
"Mutual funds having any of their operations abroad, will be required to immediately confirm that they shall wind up the same and bring them onshore within a period of one year from the notification of amending the regulations. The period is extendable by another one year on SEBI's discretion," it said.
In another move that should be helpful to investors, SEBI said one common account statement would be dispatched every month for investors who have transacted in any of his/her folios across the mutual funds.
"The statement shall also contain the disclosure related to the transaction charge paid to the distributor. One common account statement will be dispatched to the investor every half-year for all non-transacted folios." And in an initiative to reduce the use of paper, the regulator advised that unit holders, who have registered emails, would be sent the annual reports by email.