Small MFs shy away from gold ETFs

Despite the increasing popularity of Gold ETFs (exchange traded funds), small fund houses continue to shun this asset class. They fear they might not be able to reach a critical mark in this segment.

In the current financial year, gold ETFs have emerged as a distinct asset class, witnessing continuously increasing sales and net inflows, at a time when equity funds and debt funds have had ups and downs in inflows.

Data from the Association of Mutual Funds in India show that in 2010-11 till date, gold ETFs have seen net inflows rise by close to four times, to Rs 1,169 crore (Rs 11.69 billion), compared with Rs 312 crore (Rs 3.12 billion) during the same period last year.

Yet, of the 930 mutual fund schemes available, the number of gold ETFs is merely nine.

According to an independent MF expert, executive vice president at a large broking house, "Gold ETFs do not generate lot of revenues, which makes it less attractive for fund houses. More, this is an asset class dominated by large fund houses, which have a sizeable chunk of equity assets in their portfolio."

A majority of the current gold ETFs are owned by giants in the domestic fund market - Reliance MMF, HDFC MF, ICICI Prudential, UTI, SBI MF and Kotak MF. Very soon, Birla Sun Life MF, one of the top five fund houses would join; it has filed the offer document for this with the Securities and Exchange Board of India (Sebi).

Smaller fund houses which launched gold ETFs are Benchmark, Religare and Axis Mutual Fund.

The executive added that gold was very cyclical in nature and with the current sharp rise in prices, the metal appeared to be at the fag-end of a rally.

According to the chief executive officer (CEO) of a small-sized fund house, the expense ratio is less, compared with debt or equity products.

"In gold ETFs, the charges are capped at around 100 basis points. Whereas, in case of debt and equity funds, the charges are 200 and 250 basis points," he said.

"Unless one is doubly sure of reaching a critical mass in gold ETFs, it is not worth it to add a gold ETF product in the basket," said the chief investment officer at another small player.

In the past, too, he added, large fund houses had taken a longer time to increase the assets.

Further, the CEO said, in a product like this, one needs to tie-up with the custodians, which has other complications.

"A fund house needs to have a good distribution system and large network for making such a product a success, which bigger houses have been able to do," he said.