Mutual Funds
It’s raining gold funds: Religare, SBI and HDFC jump into the fray now

Gold is hovering around its highs, so fund managers now are exhibiting their herd mentality.  When gold futures are under pressure, is this the right time to buy a gold fund?

After the Reliance, Kotak and Quantum gold savings funds, Religare, SBI and HDFC have also launched an identical product.

Indians believe that gold (like real estate) always increases in price. This is true. But let that not lead you to blind belief. If you don't know by how much gold has gone up over the past 20 years or why, it would really be blind belief, if you assume that the yellow metal always goes up.

The first thing to understand about gold is that you cannot value it logically. This is because nobody pays you any income for your gold. If you invest in real estate you can get rent. If you put your money in a fixed deposit, you get interest. If you buy stocks, you may get a dividend. Anything that produces a stream of cash can be valued through P/E ratios, yields and capitalisation rates and be compared over time to determine whether it is cheap or expensive. Gold produces no cash flow. There is no analytical way to value an asset that doesn't produce cash flow. In fact, it inflicts a negative cash flow-for storing it. Anything that cannot be valued is valuable only to the extent of the price the next buyer will pay for it. That makes it a speculative product, not an investment product.

Similar to the Reliance, Kotak and Quantum funds, there are another three FoF (Funds-of-Funds) scheme filed by Religare, SBI and HDFC. All three are gold ETFs (exchange traded funds)-based FoF schemes which will invest only in their respective gold ETFs. The funds will put 95%-100% in their respective ETFs and 0%-5% in debt & money-market instruments.

What Reliance had essentially done is converted an ETF into a mutual fund product. This means Reliance can also offer it as a Systematic Investment Plan (SIP) and the same had been done by Kotak and Quantum. Now HDFC, SBI and Religare have followed suit. Reliance Gold Savings Fund had been pitched as a good option for small investors who want to invest in gold. It has opened the doors for non-demat account holders as it provides a facility to invest through the online medium and also through the physical application mode.

Those who were not able to invest in gold ETFs since they did not have a demat account can now participate by investing in this fund. The same procedure was followed by Kotak and Quantum. And now HDFC and Religare have also joined the rally. However, SBI has not mentioned anything related to requirement of a demat account (for investment) in their scheme offer document.

However, the issue is whether the product is truly beneficial for those for whom it is meant for. The gold fund is aimed at those who do not even have a demat account.

Moneylife had mentioned this when the Reliance gold savings fund was launched: "Clearly, those who do not even have a demat account don't even know about the risks of equity or are risk-averse enough not to dabble in equity shares. Most investors like them have preferred a safe investment, such as fixed deposits."

At a time when gold is making new highs, asset managers and brokers are queuing up to launch gold saving schemes which will enable retail investors (even those without demat accounts and through SIPs) to park their money in gold ETFs. First, Reliance and then Kotak and Quantum tried to reach a common class of people who did not have demat accounts and were interested in investing in gold. It targeted the middle class which represents a majority of the population. Obviously, other fund houses do not want to fall behind. So Religare, SBI and HDFC MF have joined the rally… and there will be many more to come.

As pointed out by Moneylife in February, "The price of gold has gone up six times in the last 10 years. Any asset that has gone up so much for so long a time carries a huge risk of a crash. How will a risk-averse investor react to an asset that can crash suddenly?"

And as we have said time and again that another issue with these kinds of funds is its cost structure. The entry load is nil and exit load is 2% if the investor exits within six months; 1% if the investor exits after six months but within 1 year; and nil after one year for both the funds (HDFC and Religare).

However, since these are FoF schemes, there might be ETF expense charges that one needs to pay. As per SEBI (the Securities and Exchange Board of India) guidelines, an FoF can either charge 0.75% of total expenses or it can charge a maximum of 2.5% of total expenses-including the weighted average total expenses of its underlying schemes-and not more than 0.75% as management fee from investors.

Though the Religare Gold Fund will charge 0.75% annually, it will cap the overall cost (FoF+ETF charges) at 1.50%. While the HDFC and SBI Gold Fund will charge 0.75% annually, it will cap the overall cost (FoF+ETF charges) at 2.50%. Even then, a 1.50% and 2.50% cost is pretty significant.



jimmy RICH

5 years ago

DONT make combo of gold n its crashes....we know very well any surging commodity has a fall,,,bt the thng which matters to investor is that,hw much it resists it...N my dear ppl,it has shown ironic resistance from last 450years....

Nagesh K

5 years ago

Gold may reach further highs due to uncertainty of Middle East and US dollar not looking so strong. So it can be used as a hedge. It is not totally true that is is a pure marketing strategy.
But the real thing is are there enough Gold ETF's in the market to invest in.



In Reply to Nagesh K 5 years ago

please read

Share prices try to rally. Nifty resistance at 5,620: Friday Closing Report

The market is trying to shrug off the downtrend, but it could be a short-term rally that tops out at 5,620-5,700

The election verdict from the four states and one Union Territory seemed to have a positive effect on the bourses today, as after lying low for four days, the market was in fine fettle today.

Earlier, the market opened with small gains on a mixed trend in the markets across Asia. The rate hike by the People's Bank of China on Thursday weighed on sentiment. The Sensex added 26 points to its Thursday tally to open at 18,362 and the Nifty was six points higher at 5,492.

Shortly after the opening bell, selling pressure pushed the market in the negative, with the indices touching their intra-day lows. At the day's low, at a little after 9.30 am, the Sensex stood at 18,281 and the Nifty was at 5,472.

The market emerged higher after early trends of the election results started trickling in, laying aside macro-economic worries that plague the country. Overcoming initial hiccups, the market gained strength as trading progressed. Across-the-board buying support resulted in gains for all sectoral gauges.

The benchmarks touched the day's high in the noon-session with the Sensex up 389 points at 18,725 and the Nifty up 119 points at 5,605. However, the market pared some of the gains as profit booking set in at higher levels, and settled well in the green, recovering from yesterday's losses.

The Sensex closed 195 points higher at 18,531 and the Nifty settled with a gain of 59 points at 5,545. The advance-decline ratio on the National Stock Exchange was 862:518.

As the market tries to shrug off the downtrend, today's gains could lead to a short-term rally that tops out at 5,620-5,700.

The broader indices underperformed the Sensex in trade today. The BSE Mid-cap index advanced 0.85% and the BSE Small-cap index rose 0.39%.

BSE Fast Moving Consumer Goods index (up 2.35%) was the top sectoral gainer. Other gainers were BSE Metal (up 1.48%), BSE Healthcare (1.40%), BSE Auto (up 1.35%) and Capital Goods (up 1.34%). There were no losers in the sectoral space.

Jaiprakash Associates (up 3.12%), ITC (up 3.10%), Hero Honda (up 2.48%), Jindal Steel (up 2.43%) and Bajaj Auto (up 2.17%) were the top performers on the Sensex. On the other hand, Reliance Communications (down 0.49%), Infosys Technologies (down 0.08%) and HDFC (down 0.05%) were the only losers on the index.

The Supreme Court today banned the production, sale and use of controversial pesticide endosulfan in the country for the next eight weeks, holding that human life is more important than anything else. The bench also directed the statutory authorities to freeze the production licences granted to the manufacturers of the controversial pesticide till its further order.

Markets in Asia settled mixed on the last trading day of the week on rate-tightening measures by the Chinese central bank. The South Korean market extended its losses despite the Bank of Korea keeping its key rate unchanged at 3%. Japanese banks were under pressure after the government said it may force lenders to forgo loans to Tokyo Electric Power, which has been saddled by a crippled nuclear power plant after the devastating earthquake and tsunami early March.

The Shanghai Composite gained 0.98%, the Hang Seng advanced 0.88%, the Jakarta Composite rose 0.61%, the KLSE Composite was up 0.55% and the Straits Times climbed 1.06%. The Nikkei 225 declined 0.70%, Seoul Composite fell 0.12% and the Taiwan Weighted lost 0.30%.

On Thursday, the inflows into equities from domestic institutional investors were offset by a pull-out of funds by foreign institutional investors. Domestic institutional investors were net buyers of shares worth Rs312.44 crore, while foreign institutional investors were net sellers of stocks worth Rs420.03 crore.


Idea, Spice face cancellation of licences in Karnataka, AP

The telecom ministry has issued a show-cause notice to Idea Cellular for the Karnataka circle and Spice for the Andhra Pradesh circle for cancellation of licences on account of a delay in network roll-out obligations

New Delhi: The telecom ministry has issued a show-cause notice to Idea Cellular for the Karnataka circle and Spice for the Andhra Pradesh circle for cancellation of licences on account of a delay in network roll-out, reports PTI.

"Yes, they have been issued (notices). Idea Cellular for Karnataka and Spice for Andhra Pradesh have been issued show-cause notices for cancellation of their license on account of delayed roll-out obligations," telecom secretary R Chandrasekhar told PTI.

In 2008, Idea bought Spice, but has not yet received approval from the Department of Telecommunications (DoT) to go ahead with the merger.

"The notices have been sent recently. The companies have been given 60 days to respond," he said.

Idea and Spice Telecom had procured these licences in January 2008, under the regime of former telecom minister A Raja, who has been arrested on charges of irregularities in distribution of 122 new licences along with second generation (2G) spectrum.

Earlier, the government collected approximately Rs300 crore as liquidated damages from new operators, including Idea and Spice, over their failure to roll-out their networks as per the licence agreement. After collecting the penalties, notices are now being sent for cancellation of licences.

Telecom regulator Telecom Regulatory Authority of India (TRAI) had also recommended the cancellation of licences of leading mobile operators Idea Cellular and Spice in five states for their failure to roll out services within the stipulated time.

However, Aditya Birla group firm Idea had earlier said that it has not breached the licence agreement.

When contacted to seek their comment on the receipt of the cancellation notice, Idea officials said they are yet to receive any show-cause notice.

Last month, the telecom ministry had secured an ex-parte stay from the Delhi High Court on the merger between Idea and Spice, a decision opposed by the Aditya Birla group, which charged that the DoT was trying to cover up its "inefficiencies".

Idea is facing charges of violating the terms and conditions of the licence by retaining overlapping licences, but the company claims it never wanted to retain the unused spectrum and had offered to surrender the overlapped licences.

As of 31 March 2011, Idea Cellular has 8,95,03,318 mobile subscribers.


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