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Saturday, February 16, 2013

Sebi allows mutual funds to lend idle gold

Gold demand will soften a little and returns on gold mutual funds will inch up with the capital market regulator allowing fund houses to invest their idle gold.

Gold mutual funds can now invest in gold deposit schemes of banks provided they limit their investments to 20% of the total asset base of the scheme, said a Sebi release.

This will enable the funds to earn a return on the gold they deposit and allow banks to lend gold to jewellers. Tapping a slice of this idle asset will lower demand and therefore gold import. "This will help gold ETFs to reduce their expense ration and benefit investors...It's a welcome move," said former Benchmark ETF head Rajan Mehta, who had first suggested the proposal as the govt looked for ways to curb gold import.

At present, MFs hold physical gold. "But now mutual funds will be allowed to invest 20% with banks, with this the gold so far which was held by mutual funds in physical custody will come back into circulation through banks. As a country it will help us to reduce gold imports," said Sundeep Sikka, CEO, Reliance Capital Asset Management.

Spiralling gold has pushed up India's current account, prompting the government to raise import duty on gold.

"Investors will also benefit as what ever interest rates banks give to the mutual fund scheme will go back to the investors as returns," Sikka said.

Only 20% of the gold is being allowed to be deposited with banks to make sure that funds are in a position to meet investor demand if there is a sudden redemption.

Total gold demand in India in 2012 was around 864.2 tonnes, according to World Gold Council. Of this, jewellery demand stood at 552 tonnes and investment demand at 312 tonnes.

Till now gold ETF schemes were allowed to invest in gold and gold-related instruments-- instruments that have gold as underlying. As on January 31, gold exchange-traded funds logged investments worth Rs 12,057 crore -- about 2% of the overall industry assets under management.

Before investing in gold deposit schemes (GDS) of banks, fund houses should put in place a written policy with regard to investment in GDS after getting it approved from their boards and trustees.

"The policy should have provision to make it necessary for the mutual funds to obtain prior approval of their trustees for each investment proposal in GDS of any Bank," Sebi said in a circular.

The policy shall be reviewed by mutual funds, at least once a year," Sebi said in a circular. Fund houses will have to hold the gold certificates issued by banks in a dematerialised form.

Source: Economic Times


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