UTI Mutual Fund plans to come out with a new kind of hybrid fund. The asset management company (AMC) has filed an offer document with market regulator Securities and Exchange Board of India (Sebi) for a scheme referred to as the UTI Wealth Builder Plan.
According to the offer document, the asset allocation will be among three assets: equity and equity-related instruments (65-100%), debt and money market instruments (0-25%) and gold and gold-related instruments (0-25%).
While the offer document has not stated that it will invest in stocks of gold mining companies abroad, it could well be the case since it specifies that the scheme does not plan to have more than 10% of its net assets in foreign securities. But what it is clear about is that the gold component could include domestic gold exchange-traded funds (gold ETFs). This would most probably be restricted only to UTI’s own gold ETF.
In February 2007, Benchmark AMC launched the country’s first gold ETF. The very next month, UTI AMC launched UTI Gold ETF, which delivered a one-year return of 37.36% as on 6 June. Currently, we have five gold ETFs as well as two funds which invest in stocks of gold mining companies.
The benchmark (or benchmarks, rather) for UTI Wealth Builder Plan is interesting. BSE 100 is the benchmark for the equity component of the portfolio while Crisil Bond Fund Index will serve the debt portion. The price of gold, as per Sebi regulations for gold ETFs, in India will be the benchmark for the gold component of the portfolio. Why equity and gold? Gold tends to have an inverse relationship with the equity market. The US economic slowdown, the credit crises and the instability of the dollar have hit equity markets across the globe. Investors are flocking to gold to diversify their portfolio and bring in some stability. We can see the impact back home as well. In the March 2008 quarter, there was a steep fall in the performance of all the categories of equity funds. However, DSP Merrill Lynch Gold Fund (which invests in global gold mining companies) was an exception, with a return of 13%.
It’s raining ETFs
A smart alec once said that if something moves in the market, there is an index for it. Well, what about indices which also move? For those, there are index funds and exchange traded funds or ETFs.
ETF is an index fund but it trades on the market like stocks. ETFs enable trading flexibility by intra-day buying and selling, just like any listed share. The pricing will also be almost live as the intra-day indicative prices are likely to be linked closely to the Sensex or Nifty, the main indices of the Bombay Stock Exchange and the National Stock Exchange, if the ETFs are linked to them. In the Indian context, ETFs are still in the infancy stage and will take a while to gather investor interest. The first ETF was launched in December 2001—Nifty Benchmark ETS, which got listed in January 2002. In 2007, there were a string of gold ETF launches. Currently we have five gold ETFs, which invest in physical gold.
The current turmoil in the Indian market has seen fund houses experiment with such products. In May, Kotak Mutual launched Kotak Sensex ETF. This fund will track the Sensex to provide returns before expenses that correspond closely to the total returns of the Sensex. This will be the second ETF on the Sensex. The first one (ICICI Pru Spice) was launched in January 2003; it delivered returns as much as the Sensex in the past five years, but currently has less than Rs1 crore assets under management.
Recently, Quantum Mutual Funds announced the launch of its second equity offering, Quantum Index Fund ETF, which will invest in the stocks of companies comprising the Nifty Index.