The gold exchange traded fund which allows investors to bet on gold through investing in a mutual fund scheme is slightly riskier than it used to be.
Such schemes which buy and store the yellow metal on behalf of investors are now subject to credit risk, on account of lending their stored gold to banks as allowed by the Securities and Exchange Board of India. Banks in turn make this gold available to those involved in the gems and jewellery trade. It pays the mutual fund for the use of the gold, which adds to the investors' returns.
Goldman Sachs Asset Management which runs a Rs.2300 crore gold ETF, came out with a note to investors explaining that the risk profile of the product has changed.
"A situation could arise where the issuer is unable to return the principal physical gold to GS Gold BeES upon maturity or in case of an early redemption. Such inability to return physical gold could arise on account of liquidity problems or general financial health of the issuer," said the note to investors issued last month.
This in turn poses a risk to unit holders in the mutual fund scheme.
"GDS being an unlisted and non-transferrable security can be redeemed only with the issuer and hence, is subject to the risk of an issuer's inability to meet principal and interest payments on the obligation (credit risk)," it added.
This has been considered a safer way of investing in gold, since it allows investors the same security as buying the metal in physical form, without the hassle of storage and security.
Since it held gold equivalent to investments made in the scheme, it was just as safe as buying gold physical form. Now, Gold ETFs may no longer be backed by gold equivalent to the sums invested by unit holders.
The schemes can invest up to 20% of their assets in gold deposit schemes, according to the Sebi circular on the matter.