According to fund managers, linking Gold ETFs with deposit schemes may not make any significant difference as the interest offered by banks on gold deposits is low.
The Finance Ministry on Monday proposed to permit a part of the gold physically held by mutual funds under gold ETFs to be deposited in banks, says a Ministry of Finance press release. AMCs are supposed to buy gold equivalent to total investment under gold ETF and keep it in a vault.
According to AMC officials, the fund houses would be permitted to keep up to 20 percent of the underlying gold for their gold ETFs (Exchange Traded Funds) in banks’ gold deposit schemes. According to industry officials, SEBI will announce the necessary norms for the gold ETF following the Finance Ministry’s announcement on Monday.
“The objective is to unfreeze or release a part of the gold physically held by mutual funds under gold ETFs and enable them to deposit the gold with banks under the Gold Deposit Scheme. 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 jewelry trade,” said Arvind Mayaram, Secretary, Ministry of Finance.
The release further stated that apart from gold ETFs, the changes proposed to the Gold Deposit Scheme will make it attractive for individuals to deposit their idle gold with the banks under the Gold Deposit Scheme. 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). Banks have been advised to notify the changes in the Gold Deposit Scheme.
But industry experts do not expect huge demand to be created by such modification in gold investment.
Chirag Mehta, Fund Manager (Fixed Income), 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,” Chirag said.
In addition to providing a link between the Gold ETF and the Gold Deposit Scheme, the Government has also decided to increase the import duty on gold and platinum from 4 per cent to 6 per cent with immediate effect. “Import duty increase would mean increase in landed price of gold. This implies that NAV of gold ETF would go up on this account. In India, gold demand has typically been elastic in nature, meaning that we could see some reduction in demand for gold ETF due to this. However, if we see a price correction in gold, one would see resurgence in demand, which could potentially neutralize the impact of import duty hike,” said Lakshmi Iyer, Head of Fixed Income & Product at Kotak Mutual fund.
According to the release, the notification of the gold deposit scheme will be modified by the Ministry of Finance and RBI. 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.
