Move on gold ETFs stumps fundmen

The government on Monday proposed to link gold exchange traded fund (ETF) schemes provided by mutual funds to the gold deposit schemes being run by certain banks in a bid to channel ‘idle’ physical gold to good use and reduce gold imports.   

A circular put out by the finance ministry proposed changes to the gold deposit scheme, which will make it attractive for individuals and mutual funds to deposit their idle gold with banks.

“The minimum quantity of gold that may be deposited will be reduced and the minimum tenure of deposit will be reduced to six months from the present stipulation of three years. The advantage will be that a part of the gold lying in stock will be brought into circulation and will partially meet the requirements of the gems and jewellery trade,” said Arvind Mayaram, secretary, Ministry of Finance.

But industry experts aren’t convinced.

Chirag Mehta, fund manager – commodities, Quantum Mutual Fund, pointed out that typically, gold ETFs are open-ended funds, so a lock-in clause may not work. “Gold is a counter party risk-free instrument. Hence, investors will not favour linking it to deposit schemes for the negligible amount of interest that they get on lending by banks. Gold deposit schemes have not shown any signs of take-off. With relaxation in tenure, we do not expect it to pick up,” he said.

Fund managers believe they are being wrongly targeted as mutual funds as a whole have not been significant contributor to gold imports.

“Incremental gold imports due to mutual fund buying may not be more than 20% over the last three years. Investors park money in ETFs, as there is guarantee associated with physical gold holdings. If the same is made to lend to government, or with gold deposit schemes, the gold ETF industry will be highly impacted,” said a fund manager with one of the largest domestic mutual funds.

According to the circular, the notification of the gold deposit scheme will be modified by the Ministry of Finance and RBI too will modify its guidelines reflecting these changes.  Further, Sebi will issue a circular enabling Gold ETFs to deposit part of the physical stock of gold held by them with banks under the scheme.