India’s Gold ETFs to Switch to Derivatives Instead of Physical Gold

Kotak Gold ETF is an open-ended scheme that mimics or tracks the physical price of gold.

The current investment objective of the scheme is to generate returns that are commensurate with the return on investment in physical gold, subject to tracking errors.

As per the latest notice, the scheme may also participate in gold related instruments. “Exchange Traded Commodity Derivatives (ETCDs) holding gold will be treated as gold-related instruments for Gold ETFs,” the fund house said in a release.

Commodity derivatives are financial instruments that allow investors to profit from commodities without actually owning them. A derivatives contract gives the right to exchange a commodity at a later date for a specified price.

The scheme can now be positioned in ETCDs with gold as low as 50% of the net asset value (NAV) of the scheme, as per regulatory norms.

According to Nilesh Shah, Group Chairman and Managing Director, Kotak Mahindra Asset Management Company, the fund house wants to participate in gold futures as they are cost-effective.

“If we see some opportunities in various futures contracts, we can use them to increase some returns for the unitholders,” said Lakshmi Iyer, chief investment officer (debt) and head of products, Kotak Mahindra Asset Management Ltd.

As per the scheme document, Kotak’s gold ETF may also have 0-5% allocation in debt and money market instruments.

Kotak Gold ETF was launched in July 2007, and has assets under management as of today 2,357 crore till 30 September.

As per the data available with valueresearchonline, the scheme has given an annualized return of 11.07% since inception and has given returns of 5.62%, 8.60% and 10.72% respectively on one year, three year and five year basis.

Market regulator Securities and Exchange Board of India (SEBI) allowed Indian mutual funds to participate in the derivatives segment in 2019 for the first time.

However, some fund houses are yet to invest in ETCDs.

For example, as per the Scheme Information Document (SID) of India’s largest gold fund – Nippon India ETF Gold BES (AUM of Rs. 6,532 crore) — This scheme does not have investment in ETCD.

Another fund house, Quantum Mutual Fund also does not hold ETCD in its Gold Fund.

“In case of exposure through ETCDs, the incremental cost benefit earned from lower storage cost gets offset by the rollover cost to carry forward the derivative position. Further, the quality of the underlying gold held in ETCDs may differ from the physical gold held by Gold ETFs,” said Ghazal Jain, Fund Manager, Quantum AMC.

The AUM of Quantum Gold Fund is 141 crore till September 30 and has given returns of 3.69%, 7.97% and 10.28 per cent on one year, three year and five year basis respectively.