Reliance launches Banking ETF

The Reliance AMC has launched a banking ETF (Exchange Traded Fund). The launch comes as a surprise because the AMC already runs the largest actively managed banking mutual fund called Reliance Banking that has an AUM of Rs. 938 crore. Though Reliance Banking as done well with a total return of 41 per cent per annum, the fund has barely managed to beat its benchmark in its 5-year life.

ETFs are like Index funds which trade on the market like shares where customer can buy and sell the bankin index. The Reliance Banking ETF will deliver returns exactly like the banking Index, but minus the expenses. Like any index fund, the fund will have lower expense.

This fund will track the CNX Bank Index, which has 12 liquid and large Indian banking stocks. Since inception, its return has been 27 per cent on an average. As on April 30, 2008, its constituents included -- State Bank of India (27.85 per cent), ICICI Bank (24.3 per cent), HDFC Bank (13.43 per cent), Axis Bank (8.21 per cent), Kotak Mahindra Bank (6.78 per cent), Bank of India (4.47 per cent), Punjab National Bank (4.31 per cent), Bank of Baroda (2.85 per cent), Canara Bank (2.42 per cent), Union Bank of India (2.01 per cent), IDBI (1.88 per cent) and Oriental Bank (1.36 per cent).

The scheme's asset allocation will be 90 per cent in the equities of its Index and rest 10 per cent in other equities or debt instruments.

Similar Funds
This will be the second ETF to track a bank index. The first was Benchmark's Banking BeES, which has delivered 36 per cent return since its launch in May 2004. There are two relatively new ETFs as well, which track the PSU Bank Index - Kotak PSU Bank ETF and PSU Bank BeES.


Scheme Details:
Issue Opening Date : May 12, 2008
Issue Closing Date : May 30, 2008
Fund Category : Exchange Traded Fund
Fund Type : Open-end, Exchange traded
Benchmark : CNX Bank Index
Cost : The fund has 2.25% entry load during NFO. Investors will incur brokerage on sale and purchase after listing of the ETF inline with the brokerage that the broker will normally charge.
Minimum Investment : Rs 5000(During the NFO)

Reliance Gold Exchange Traded Fund

Reliance Mutual Fund has launched a Gold Exchange Traded Fund - Reliance Gold Exchange Traded Fund. This open-ended fund will track domestic prices of gold through investments in physical gold. The fund will be initially available for subscription from October 15, 2007 to November 1, 2007.

The fund aims to provide returns that closely correspond to the return provided by the price of gold through investment in physical gold. The performance of the scheme may differ from that of domestic price of gold due to expense and other related factors.

An investor can buy/sell units of RGETF on a continuous basis on the National Stock Exchange and/or other recognised stock exchanges where units are listed and traded like any other publicly traded securities at market prices which may be close to the actual NAV of the scheme.

Around 90-100 per cent of investments would be allocated to physical gold and gold related instruments. Debt and money market component in the portfolio would be upto 10 per cent.

Snapshot
Face value: Rs 100
Type: Open-end, Gold ETF
Options: Dividend
Minimum application amount: Rs. 5000
Entry load: The fund would charge an entry load of 1.50% for investment less than Rs. 1 lakh, 0.75% for investment equal to or greater than Rs.1 lakh but less than Rs. 25 lakhs, 0.50% for investment equal to or greater than Rs.25 lakhs but less than Rs. 50 lakhs and 0.25% for investment equal to or greater than Rs.50 lakh but less than Rs. 1 crore.

Exit Load: Nil
This load is applicable during the NFO period but on the continuous basis the fund would not charge any entry or exit load.

Kotak Gold ETF lists on NSE

The open-ended Kotak Gold ETF got listed on the NSE yesterday (August 9th 2007) (Read Investing in Gold to get a good idea of investing on gold) and opened at the price of Rs 919, which is also day’s high, against its issue price of Rs 892.15. It touched a low of Rs 880 before closing at Rs 892.15. The total quantity traded was 15,257 units, of which 17 per cent was presented for delivery. The Kotak Gold ETF will invest in gold, engage in gold lending, deposit gold with banks in return for fees to the extent permitted by regulators. The asset base of this open-ended Gold ETF is between Rs 40-42 crore.

Please note that this is the third ETF where the underlying asset is gold that is trading at the National Stock Exchnage. The other schemes traded at the national Stock exchange are UTI GOLD EXCHANGE TRADED FUND (NSE Code - GOLDSHARE) and GOLD BENCHMARK EXCHANGE TRADED SCHEME (GNSE Code - OLDBEES).

Investing in Gold

Investment in Gold has always been happening in India for various reasons such as diversification, holding gold as an asset class, Hedge against inflation, Low volatility (not really in the recent past if you look at the price movement of gold) as compared to equities and finally acts as a store of value which can be pledged or sold in the case of dire straits.

Primarily the investment in gold in the past has been in the form of jewellery (worst form of investment in gold if considered from an investment purpose) or gold bars (of 1 gm, 5 gm, 10 gm or 1 tola etc). Some also Trade in Gold futures (will be discussed in future posts).

However, introduction of Gold exchange traded funds allow investors to invest in gold and hold them in a virtual form rather than physical form thus having significant benefits. These are essentially open ended funds that are listed and traded on exchanges like stocks where you can buy and sell them like stocks through stock brokers and hold them in the demat form. These are designed to provide returns that, before expenses (typically between 1% and 2% of the assets under the management will be considered as the management fee) as, closely correspond to the returns provided by physical Gold. Each unit of the mutual fund is approximately equal to the price of 1 gram of Gold.

What are Advantages of Investing in Gold exchange traded funds ?
• Potentially cheaper to have price exposure to gold price as compared to other available avenues such as jeweler, bank
• Quick and convenient dealing through demat account
• No storage & security issues for investors
• Transparent pricing as it is linked to international gold prices and traded in stock exchanges
• Taxation of gains is similar to that of Non equity Mutual Fund
• Listed and traded on stock exchange just like a stock therefore leading to easy buying/selling
• Ideal for Retail investor as minimum lot size to trade is one unit on secondary market.
• NAV of a Unit will track price of approximately 1 Gram of Gold

Schemes such as UTI MUTUAL FUND - UTI GOLD EXCHANGE TRADED FUND (NSE Code - GOLDSHARE) and BENCHMARK MUTUAL FUND - GOLD BENCHMARK EXCHANGE TRADED SCHEME (GNSE Code - OLDBEES) are some of the Gold exchange traded funds that have been launched some time ago.

Schemes such as Kotak Gold ETF are soon going to be launched.

Since the Gold exchanged Mutual Fund is classified as a Mutual Fund, investor need not pay wealth tax. The scheme will have Non equity Mutual Fund Taxation rules applicable as per current Tax laws, where investor has to pay the tax only after redemption. Typically the factors that affect the performance of the fund will be the following

• Closing price of gold in the London Bullion Market Association AM fixing price on that particular day in US$/ounce.
• Rupee to US dollar value. A rising rupee means that gold gets cheaper.
• Crude prices. Increase in crude prices will normally lead to increase in the gold prices.

Typically gold should constitute upto 5% of the portfolio of an individual's assets.