And the Award for the Best Financial Innovation goes to...

Posted On Friday, Sep 03, 2010

We consider Gold ETFs to be the "Best Financial Innovation". And that’s not because we have a gold ETF offering but in fact it’s the other way round!

Imagine if you were able to buy gold at prices very close to those at which tonnes and tonnes of gold get transacted between a producer/ refiner and a bullion bank or any other big institutional investor. No making charges, no premiums involved! You can buy even ½ gram of gold at such prices. That’s the beauty of gold ETFs.

Gold ETF’s relieve buyers from the heavy premiums that are usually associated with buying gold in physical form at the retail level - be it coins / bars or gold jewellery.

Innovation needs to be synergized

As per Wikipedia: "Synergy, in general, may be defined as two or more agents working together to produce a result not obtainable by any of the agents independently."

That’s exactly the way forward to ease the burden of buying gold from the shoulders of the investors.

Two years ago, when we launched the Quantum Gold ETF, we tossed a question to a few gold jewellers - would they accept Gold ETF units in lieu of cash from investors when they want to convert some of their investments to jewellery form?

The thought was to pass on the efficiency of gold ETF to the end investor, to you. Gold purchasers can continue to accumulate gold in smaller quantities through gold ETF’s and when they feel like it , they can exchange their units for jewellery.

Some jewelers seemed to like the idea but the majority was not too convinced.

Under this arrangement, jewelers can recover the cost of gold from the ETF surrendered and then separately charge buyers for making charges and margins, if any.

This would surely bring in more transparency in the buying process and allow investors to buy gold more efficiently.

The recent debate

I recently attended a Gold conference where the same issue was discussed. The panelist who raised the proposal was also a Gold ETF issuer.

Some in the audience appreciated the idea whereas some showed (a now familiar) reluctance.

One of the other panelists, who dealt in jewellery / coins / bars, obviously rejected the idea. He was of the opinion that the two ends should be kept at length. Initially, he raised his doubts relating to the VAT issues, which were countered with possible solutions. He persisted with his denial without any real acceptable reason. Contrarily, he added that we could do this for exchange of physical gold but not with ETFs! You most definitely are aware of the premiums involved in the purchase of gold coins and bars; it would thin your wallet out by a tidy sum.

I still don’t understand the reason for his unwillingness. Gold ETFs are considered "As good as Gold" since units are backed by physical gold and can be converted to physical gold. If they accept gold ETFs, they could convert these gold ETFs to physical gold which they can use for making jewellery and that they usually buy such gold from banks / wholesalers.

Was this denial arising from years of wisdom gathered from being in gold business or from a sense of losing out on account of increased transparency?

I recently bought a piece of jewellery and the gold price charged was Rs. 1000 per 10 grams higher than the prevailing price. The making charges are over and above this premium charged. It could be these margins the jewelers wish to protect.

With exchange through ETFs, these margins are likely to be affected. Could this be a probable reason for his denial or is there more to it which beats our understanding?

Innovation, the Need of the hour

Innovation as described by Wikipedia is a change in the thought process for doing something, or the useful application of new inventions or discoveries.

In keeping with our philosophy, we at Quantum Mutual Fund, have always strived to innovate for the betterment of investors:

  1. The only ½ gram gold ETF in the country
  2. No distribution commissions
  3. Focus on Investor education

We are trying to work on how the mechanism of this initiative - of selling ETFs to the retail investor and then exchanging ETFs for Gold; would pan out, as and when this facility does come into existence. This mechanism doesn’t seem very difficult to operationalise if all concerned parties get involved.

The major hindrance currently is the resistance from the jewelers who need to partner us for this innovation.

We would surely continue to do our bit in our endeavor to innovate and try to synergize for the betterment of gold buyers and investors.

We want you to contribute by requesting your jeweler to accept gold ETF in lieu of your gold purchases.

With an increase in customer demand, we are certain that jewelers would also realize the importance of this facility.


The views expressed in this article are the personal views of the Fund Manager of Quantum Gold Fund. The views constitute only the opinions and do not constitute any guidelines or recommendation on any course of action to be followed by the reader. This information is meant for general reading purpose only and is not meant to serve as a professional guide/investment advice for the readers. This article has been prepared on the basis of publicly available information, internally developed data and other sources believed to be reliable. Readers are advised to seek independent professional advice and arrive at an informed investment decision before making any investments.

Investment Objective: Quantum Gold Fund’s (QGF) investment objective is to generate returns that are in line with the performance of gold and gold related instruments, subject to tracking errors. However, investment in gold related instruments will be made if and when SEBI permits mutual funds to invest in gold related instruments. The Scheme is designed to provide returns that before expenses, closely correspond to the returns provided by gold. Asset Allocation: QGF will primarily invest in physical gold and if allowed under SEBI Regulations, also in gold related securities including derivatives, and the scheme may invest in Money Market Instruments, short term corporate debt securities,CBLO and units of Debt and Liquid Schemes of Mutual Funds to meet liquidity needs. Terms of Issue: QGF is an open-ended Gold Exchange Traded Fund. Each unit of QGF will be approximately equal to the price of half (1/2) gram of Gold. Units will be issued at NAV based prices. On an ongoing basis direct purchases from the Fund would be restricted to only Authorised Participants and Eligible Investors. Units of QGF can be bought /sold like any other stock on the National Stock Exchange of India Ltd (NSE) or on any other stock exchanges where it is listed.   Entry Load: N.A. Exit Load: Nil in case of Authorised Participants; 0.5% in case of Eligible Investors. Risk Factors: All Mutual Funds and securities investments are subject to market risks including uncertainty of dividend distributions and the NAV of the schemes may go up or down depending upon the factors and forces affecting the gold and securities markets and there is no assurance or guarantee that the objectives of the scheme will be achieved. Quantum Gold Fund, is the name of the scheme and does not in any manner indicate either the quality of the Scheme, its future prospects or returns. Scheme Specific Risk: The QGF’s NAV will react to the Gold price movements. The Investor may lose money over short or long period due to fluctuation in Scheme’s NAV in response to factors such as economic and political developments, changes in interest rates and perceived trends in bullion prices, market movement and over longer periods during market downturns. Trading volumes, settlement periods and transfer procedures may restrict the liquidity of these investments of the QGF.  It is to be distinctly understood that the permission given by NSE should not in any way be deemed or construed that the Scheme Information Document for QGF has been cleared or approved by NSE nor does it certify the correctness or completeness of any of the contents of the said Scheme Information Document. The investors are advised to refer to the Scheme Information Document of QGF for full text of the ‘Disclaimer Clause of NSE’. Statutory Details: Quantum Mutual Fund (Fund) has been constituted as a Trust under the Indian Trusts Act, 1882.Sponsors: Quantum Advisors Private Limited. (Liability of Sponsor limited to Rs. 1,00,000/-)Trustee: Quantum Trustee Company Private Limited. Investment Manager: Quantum Asset Management Company Private Limited (AMC). The Sponsor, Trustee and the Investment Manager are incorporated under the Companies Act, 1956..The past performance of the Sponsor / AMC/ Fund has no bearing on the expected performance of the scheme. Mutual Funds investments are subject to market risks. Please read the Scheme Information Document(s) / Key Information Memorandum(s) / Statement of Additional Information / Addendums carefully before investing. Scheme Information Document(s) /Key Information Memorandum(s)/ Statement of Additional Information can be obtained at any of our Investor Service Centers or at the office of the AMC 505, Regent Chambers, 5th Floor, Nariman Point, Mumbai – 400 021 or on AMC website www.QuantumAMC.Com /

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