It’s no secret that gold exchange-traded funds (ETFs) have become a popular way of investing. However, some investors worry that physical gold held by asset managers against their paper investment may not be of highest purity. Typically, physical gold held against paper units are of 99.5% purity and that is verified by the custodians of the mutual fund (MF) house.
In case of domestic gold ETFs, the capital markets regulator, Securities and Exchange Board of India (Sebi), mandates the purity of gold bars to be held by the asset manager. Most fund houses hold gold bars with purity of 99.5%.
Typically, the level of purity for gold held is mentioned in the scheme information document. So, the fund house has to disclose upfront the quality of gold they will invest in and that inventory can’t be used for any further transactions other than as a physical value against issued paper units. This assures investors at all times and they don’t personally have to check the purity with each purchase as is the case in case of buying gold bars from a jeweller.
Purity tests by custodians
Every MF has a custodian—a bank, a trust or a financial institution—responsible for holding and safeguarding securities owned by the fund house. The custodian also verifies the purity for physical gold held by the fund. The verification is done not for the quality of gold, rather the certification of purity is verified to ensure that it is genuine and issued by a known refiner. While frequent checks are not mandatory, the practice in the Indian MF industry is to get purity checked by the custodian every time physical gold is bought. Fresh stock gets added when new units are bought. So if you have just bought units in the fund worth Rs 1 lakh, physical gold to that extend gets added to the existing stock.
Assaying by outside agencies
Another way to verify the purity of gold bars is to get them tested by an outside agency having the technical expertise to do so. Assaying essentially refers to investigating or technically analysing the quality of metal, among other things, to determine impurities in a precious metal like gold. While not many MFs get this done and neither is this mandatory, some do it as an additional measure. Keep in mind that this is not a simple process and involves physically handling the gold and perhaps transporting it out of the vault, which puts the metal at risk anyway.
Mint money take
Whether purity is checked by the custodian or an outside agency, the important aspect is that the purity of gold held in ETFs is certified and also verified in a timely manner. In both cases, it is favourable for investors, who want to be part of the gold investment proposition but don’t want to deal with the minor details of quality checks.