Bharat 22 ETF Allotment Status & Listing

This post is written by Shiv Kukreja, who is a Certified Financial Planner and runs a financial planning firm, Ojas Capital in Delhi/NCR. He can be reached at skukreja@investitude.co.in

ICICI Prudential has initiated the allotment process of Bharat 22 ETF and I think most of the investors must have received the allotment SMS or mail from ICICI Pru or their respective brokers or DPs by now. If you have not received any such intimation mail/SMS regarding the same, then you can check your allotment status from this link available on the website of ICICI Pru AMC – Bharat 22 Allotment Status.

Bharat 22 ETF offer period started on November 15 for the non-anchor investors and closed on November 17. It received an overwhelming response from the anchor investors, Qualified Institutional Buyers (QIBs) and Non-Institutional Investors (NIIs) and got subscription worth Rs. 31,750 crore approximately. Though retail category and retirement fund categories remained undersubscribed, but given their share of reservation, it was nowhere a bad response from either of them.

Units Allotted @ Rs. 35.97 Per Unit – Retail applicants, who submitted an application of Rs. 2 lakh worth of Bharat 22 units, have been allotted 5,560 units @ Rs. 35.97 per unit, which makes it Rs. 1,99,993.20 as against Rs. 2 lakh investment. So, it is 100% allotment this time around for a government backed ETF. Investors will get the balance investment amount credited directly to their respective bank accounts.

Discount of 3% – Allotment Price of Rs. 35.97 a unit has already incorporated the discount of 3% committed by the government. It makes its market value to be Rs. 37.08 a unit. However, as compared to Friday’s closing level of 3,748.85 for the S&P BSE Bharat 22 Index, the allotment price of Rs. 35.97 translates into a notional gain of 4.22% before listing.

PAN, DP ID – Client ID Required –  You can check the allotment status of your investment in this ETF by entering your PAN number and DP ID – Client ID as you visit the allotment status link for this ETF.

Contact ICICI Pru AMC or CAMS for Allotment Issues or Queries – If you have not received any intimation, message or mail regarding its allotment and if it is not there in your demat account as well, you can either contact ICICI Prudential AMC on its toll-free no. 1800 000 6666 or 1800222 999 or its Registrar, Computer Age Management Services (CAMS) on 1800 200 2267 or 1800 419 2267.

Expected Listing on November 28 or 29 – Units of this ETF will be credited to our demat accounts on Monday and listing is expected within 2 working days post allotment.

If you have any more info about its allotment or any other query regarding Bharat 22 ETF, please share it here. I’ll try to respond to it as soon as possible.

ICICI Prudential Bharat 22 ETF NFO – November 2017 Issue

This post is written by Shiv Kukreja, who is a Certified Financial Planner and runs a financial planning firm, Ojas Capital in Delhi/NCR. He can be reached at skukreja@investitude.co.in

Bharat 22 ETF – Allotment Status

Finance Minister in his budget speech had set Rs. 72,500 as the disinvestment target for the current fiscal year 2017-18. In order to meet this steep target, the government has decided to sell its stake in 22 of its holdings, by forming an altogether new index called “S&P BSE Bharat 22 Index”. As its name suggests, this index has been designed by the Bombay Stock Exchange (BSE) in consultation with the government. Unlike Nifty CPSE Index, which has all its constituents to be the CPSEs, Bharat 22 Index has CPSEs, PSUs and 3 private companies (L&T, ITC and Axis Bank) as its constituents.

Here is the list of all its 22 constituents and their weightage in the index:

picture1

ICICI Prudential Bharat 22 ETF is an open-ended index scheme, to be listed on the stock exchanges in the form of an Exchange Traded Fund (ETF) tracking the S&P BSE Bharat 22 Index. This ETF has been launched by ICICI Prudential Asset Management Company and is named as Bharat 22 ETF.

Investment Objective – Bharat 22 ETF intends to generate returns that closely correspond to the total returns earned by the securities as represented by the Bharat 22 Index. However, the performance of the scheme may differ from that of Bharat 22 Index due to tracking error and also due to the scheme expenses.

NFO Opening & Closing Dates – This scheme will remain open for four days, only one day for the anchor investors i.e. November 14 and then three days for the non-anchor investors, including retail investors. For the non-anchor investors, it will open for subscription on November 15 and run for three days to close on November 17.

Reference Market Price/NAV – New Fund Offers, or popularly known as NFOs, normally get launched at Rs. 10 per unit as their NAV. This will not be the case with this scheme. During the NFO, each unit of this scheme will have a face value of Rs. 10 and will be issued at a premium, equal to the difference between the face value and the allotment price.

NAV of this scheme will be based on the Bharat 22 Index, and the allotment price would be approximately equal to 1/100th of Bharat 22 Index and calculated post adjusting the 3% discount offered by the government to Bharat 22 ETF for buying the underlying Bharat 22 Index shares.

3% Discount for All Investors – Investors making an investment during the offer period will be given a 3% discount on their investment. This 3% discount on the “Reference Market Price” of the underlying Bharat 22 Index shares will be offered to Bharat 22 ETF by the government of India.

Categories of Investors & Allocation Ratio

Anchor Investors – 25% of the total amount raised or 25% of Rs. 8,000 crore, whichever is higher, has been reserved for the anchor investors.

Retail Individual Investors (RIIs) – 25% of the total amount raised or 25% of Rs. 8,000 crore, whichever is higher, has been reserved for the retail individual investors also.

Qualified Institutional Buyers (QIBs) & Non-Institutional Investors (NIIs) – QIBs and NIIs too will have 25% of the issue reserved for each of their categories. In case of undersubscription in any or both of these categories of investors, unsubscribed portion will be allocated to the retail investors.

Target Amount to be Raised – The government has decided to raise Rs. 8,000 crore from this scheme. However, in case of oversubscription, the government would like to retain the whole of oversubscription in order to bridge its disinvestment target gap. So, it is highly likely that full allotment will be made to the retail individual investors.

Minimum/Maximum Investment Size – Retail individual investors can invest in the scheme with a minimum investment amount of Rs. 5,000. To remain a retail investor, the investment limit has been set at Rs. 2 lakhs.

Allotment & Listing – As per the offer document, investors will get the units allotted within 15 days from the closing date of the issue and listing on the stock exchanges will happen within 5 days from the date of allotment. However, like earlier CPSE ETF issues, I expect the allotment and listing to happen within 7-10 working days from the date the issue gets closed.

Demat Account Mandatory – As you cannot hold and trade ETFs in physical form, it is mandatory to have a demat account for you to invest in this scheme. Applications without relevant demat account details are liable to be rejected.

No Lock-In Period – As this ETF do not provide any tax benefit, there is no lock-in period for the non-anchor investors. Investors can sell their units whenever they want to do so.

Entry & Exit Load – There is no entry load to invest in this scheme and there is no exit load either as and when you decide to sell its units on the stock exchanges. You will be required to pay just your normal brokerage and other government taxes when you sell these units.

2.21% Dividend Yield – As per the BSE website, constituents of Bharat 22 Index are generating 2.21% dividend yield for its investors based on the dividends paid in the last one year. Though dividend yield is not a significant factor for me to invest in stocks or mutual funds/ETFs, I think this dividend yield of 2.21% is not too great for me to reconsider it for my portfolio.

20.28X PE Ratio – Price to earnings ratio (P/E Ratio) of Bharat 22 Index at present is ruling at around 20.28 times. If you consider Nifty to be trading at a P/E multiple of 26-27 times its trailing EPS, I think Bharat 22 Index is not too attractively valued considering most of its constituents are CPSEs or PSUs. You can only bank on their earnings recovery in order to expect a gradual rise in their share prices.

Should you invest in ICICI Prudential Bharat 22 ETF NFO?

Except 3% discount, there is nothing extraordinary in this ETF which attracts me to apply for it in this NFO. As most of its constituents are already trading close to their 52-week highs, you can consider this ETF to be trading close to its 52-week high. However, this should not be considered as anything negative for this ETF. If a stock is trading at or close to its all-time or 52-week highs, it doesn’t mean that it cannot go higher from those levels. Similarly, this ETF too has the potential to scale newer highs if its constituents continue rising as they have been in the last few months.

However, as most of these companies are CPSEs and PSUs, I think it is the government policies which are going to drive the share prices of these companies and thereby this ETF. Let us consider the decision taken by the government to recapitalise the public sector banks (PSBs) with Rs. 2.11 lakh crore worth of infusion over the next 2 years. Though it is a very positive measure announced by the government, but after all it is just an announcement and nothing concrete has taken place to actually strengthen these banks’ balance sheets and most importantly, this bank recap has done nothing to resolve the basic problems of PSBs – 1) extraordinary high levels of NPAs, and 2) poor level of accountability the managements of these public sector banks have shown over the past many years in which many of the private sector banks and NBFCs have flourished to higher levels over the opportunities lost by these PSBs.

Still, this announcement of bank recap has resulted in 36% returns in Nifty PSU Bank Index since Muhurat Trading on Diwali, from 2942.7 on October 19 to 4001.45 on November 10. What I want to say here is that if just an announcement of doing something good for the health of the public sector enterprises or overall economy can deliver such high returns in such a short period of time, then I think nobody has truly imagined the actual potential of these CPSEs and PSUs if the government honestly gets serious with its duty to run these companies professionally. If you trust the intentions and policy execution capabilities of the Modi government, then only this ETF is worth investing your money at these levels, or otherwise, go for the diversified equity mutual funds.

ICICI Prudential Bharat 22 ETF Application Form

List of India Based ETFs in USA

When I did the post on the best India based ETFs in US, I noted that there were several new ETFs since I last did the post and all of them were different from one another.

In this post I’m going to list down each of those ETFs along with a brief description of what their intended goal is. I have left the YTD returns as it is in the table just for reference.

 

No.

ETF

YTD Return*

Description

1EGShares India consumer (INCO)  50.25%It is an ETF that invests in companies that belong to the consumer sector in India. It owns stocks of the Indxx India Consumer Index, a 30 stock free-float adjusted market capitalization index designed to measure the market performance of companies in the consumer sector of India.
2iShares S&P India Nifty 50 Index Fund (INDY) 29.47%This ETF invests in the stocks that form Indian Nifty. The iShares S&P India Nifty 50 Index Fund seeks investment results that correspond generally to the price and yield performance, before fees and expenses, of the S&P CNX Nifty.
3India Infrastructure ETF (INXX)29.11%This ETF invests in the infrastructure sector companies in India. The EGShares India Infrastructure exchange-traded fund (ETF) seeks investment results that generally correspond performance of the Indxx India Infrastructure Index. The Indxx India Infrastructure Index is a free-float market capitalization weighted stock market index comprised of 30 leading companies that Indxx, LLC determines to be representative of India’s Infrastructure industries, as defined by the Industry Classification Benchmark (ICB). 
4EGShares India Small Cap (SCIN) 28.89%The EGShares India Small Cap Exchange Traded Fund (ETF) seeks investment results that generally correspond (before fees and expenses) to the price and yield performance of the Indxx India Small Cap Index. The index is a free-float market capitalization weighted stock market index comprised of a representative sample of 75 Indian companies that Indxx, LLC determines to be the representative of small market cap companies in India.
5India Small Cap Index ETF (SCIF)26.5%The Market Vectors® India Small-Cap Index ETF (SCIF) seeks to replicate as closely as possible, before fees and expenses, the price and yield performance of the Market Vectors India Small-Cap Index (MVSCIFTR), a rules-based, modified market capitalization-weighted, float-adjusted index intended to provide exposure to Indian small-cap companies.
6iPath MSCI India Index ETN (INP) 26.89%This is a Note and not a fund which means it doesn’t actually own the underlying assets and is like a debt instrument which pays you returns equivalent to the index.iPath MSCI India Index ETN is an exchange-traded note issued in the USA. The Notes will provide investors with a cash payment at the scheduled maturity or early redemption based on the performance of the underlying index, the MSCI India Total Return Index.

7WisdomTree India Earnings Fund (EPI)23.93%It is an ETF that invests in about 200 large Indian companies.
8PowerShares India Portfolio (PIN) 13.94%The PowerShares India Portfolio (Fund) is based on the Indus India Index (Index). The Fund will normally invest at least 90% of its total assets in securities that comprise the Index and American depositary receipts based on the securities in the Index. The Index is designed to replicate the Indian equity markets as a whole, through a group of 50 Indian stocks selected from a universe of the largest companies listed on two major Indian exchanges.
9Direxion Daily India Bull 3X Shares (INDL) 22%This ETF is only meant for people who are interested in very short term trading and understand that this ETF seeks to magnify daily performance three times and the same result won’t be achieved on a longer timeframe.
10MSCI India Index Fund (INDA) NA

The MSCI India Index is designed to measure the performance of the large and mid cap
segments of the Indian market. With 73 constituents, the index covers approximately 85%
of the Indian equity universe.

11MSCI India Small Cap Index Fund (SMIN)NAThe MSCI India Small Cap Index is designed to measure the performance of the small cap
segment of the Indian market. With 205 consituents, the index represents approximately
14% of the free float-adjusted market capitalization of the India equity universe.

*Returns as on Nov 29 2012.

Why has EGShares India consumer (INCO) risen 50% in the last year?

When I did the best performing US based India ETFs a couple of weeks ago, one name was leading the rest of them by wide margin.

EGShares India consumer (INCO) has risen by about 50% this year, and this is a lot more than any other India based ETF that exists in the US this year.

I was curious to see why this was the case and reader RK Patil sent an email to me with why this was the cause. Here’s what he said (slightly edited).

INCO’s good performance is due to concentrated holding in United Breweries & United Spirits due to take over chances.

Even Indian FMCG sector  funds (SBI Magnum FMCG) &ICICI FMCG  has shown good performance (more than 40%) due to ITC .

I looked at the breakup of the holdings of this fund and saw that what he was saying was exactly right. INCO owns 30 shares, and as of last Sunday here are its top ten holdings against which I have added a column of year to date returns as well.

No.

Holding

% of total assets

YTD Return*

1United Spirits Limited  7.88%167.7%
2Hindustan Unilever Ltd 5.82% 42.07%
3United Breweries Ltd5.62%101.42%
4Godrej Consumer Products Ltd5.62%85.4%
5ITC Limited5.38% 55.8%
6Mahindra & Mahindra Ltd4.89% 35.8%
7GlaxoSmithKline Consumer Healthcare Ltd4.72% 47.94%
8Zee Entertainment Enterprises Ltd 4.68% 70.46%
9Titan Industries Ltd 4.66%67.28%
10Tata Global Beverages Ltd 4.57% 92.46%

*Returns as on Dec 09 2012

As you can see from the numbers above a few of their stocks have done so well that it has given a tremendous boost to the fund performance. This of course can’t be a basis for long term selection into this ETF because who knows whether they will be able to own other stocks that do so well in the future or not.

This fund is focused on consumer sector in India and if this was the sector you wanted to get exposure to you should buy the fund, and not this year’s performance alone.  Some of these stocks have done great this year, but in a down market such stocks can go down a lot as well.

This table brings to mind another interesting question which is what do you do when you see one or two companies in your portfolio do too well and they account for a large majority of your portfolio? I’m sure a lot of people have seen this situation int the past year, and in a future post I’ll share some thoughts on what I do when I encounter such a situation.

Best Performing US Based India ETFs in 2012

When I wrote about how NRIs could invest in India last week, one of the options I mentioned was India based ETFs listed in your domestic exchange.

For most NRIs, this is a very convenient method and is useful for others who are interested in gaining exposure to India as well.

There are a number of India based ETFs in the US and in this post I’m going to list them down along with their performance in 2012 as well as what indices they track.

No.

ETF

YTD Return*

Index

1EGShares India consumer (INCO)  50.25%Indxx India Consumer Index
2iShares S&P India Nifty 50 Index Fund (INDY) 29.47%S&P CNX Nifty
3India Infrastructure ETF (INXX)29.11%INDXX India Infrastructure Index
4EGShares India Small Cap (SCIN) 28.89%Indxx India Small Cap Index.
5India Small Cap Index ETF (SCIF)26.5%Market Vectors India Small-Cap Index
6iPath MSCI India Index ETN (INP) 26.89%MSCI India Total Return Index
7 WisdomTree India Earnings Fund (EPI)23.93%WisdomTree India Earnings Index.
8PowerShares India Portfolio (PIN) 13.94%India Index (Index)
9Direxion Daily India Bull 3X Shares (INDL) 22%Indus India Index
10MSCI India Index Fund (INDA) NAMSCI India Index
11MSCI India Small Cap Index Fund (SMIN)NAMSCI India Small Cap Index

*Returns as on Nov 29 2012.

A few points on the table above:

INCO’s Exceptional Performance

EGShares India Consumer (INCO) is unusually up, and I don’t know why that is at the moment, but I will do a follow up post on this unusual gain next week.

Similar Performance

Other than that, most other ETFs are close in returns even though they are quite different in nature, and this is perhaps a bit disappointing for the small cap ETFs because in India, the small caps tend to fall a lot more than the large caps during bear runs so you would hope that the small caps outperform the large caps as well. However, at least for this small time period, that hasn’t been true.

Wide Range of India Based ETFs

I had done such a list some time ago, and at the time there were only three or four ETFs so I am pleasantly surprised to see a lot more options present in the India ETF list today. You have a lot more options to choose from, and they are all quite different from one another.

Conclusion

There are quite a few India based ETFs in the US and at least for American investors who want to invest in India, there is no dearth of options. All these options also mean that you need to research them carefully and understand what you are buying into. INDY is very different from PIN and PIN is very different from INDA. I will do a detailed post on the objective of each of these funds later on in the year, and that will help build a good understanding of what fund to invest in based on your goal.

 

Motilal Oswal MOSt Shares Gold ETF Review

Motilal Oswal has come up with an interesting product in the crowded space of gold ETFs with its MOSt Gold shares ETF. The new fund offer for this opened on March 02 2012 and will close on the March 16 2012.

This is a gold ETF which means that the fund will buy physical gold as its underlying and trade on the stock market. It will trade on both the NSE and the BSE. In this respect, it is similar to every other gold ETF that exists in the market right now; what makes it different from all the other funds is that in this ETF you can actually redeem your units and get delivery of physical gold.

I’ve seen numerous comments from people who have said that they want to be able to redeem their gold ETFs with physical gold and Motilal Oswal has sensed this opportunity and brought out this unique product to cater to it.

If you remember the post about the difference between mutual funds and ETFs – I used this diagram there to show the process of creation and redemption of ETF units.

The same thing is applicable here as well, and the only difference is that they have made the redemption units really small by allowing investors to redeem just 10 grams of gold whereas for other ETFs this is a much larger number like a kilogram.

So, if you have 10 units which are equivalent to 10 grams of MOSt Goldshares you can ask Motilal to redeem your units for physical gold.

You don’t get exactly the price of 10 grams for 10 units because they will deduct transaction charges at the rate of Rs. 750 per 10 grams and Rs. 250 per 100 grams if you want to get physical gold (no charges for a kilo) and secondly the expenses of the scheme will be deducted from the NAV and as time progresses each unit will represent less than a gram.

MOSt Goldshares will charge 1.3% expense ratio which means that they will use up to 1.3% of the total assets under management to cover for their expenses. This money is reduced from the NAV so although one unit of gold ETF is supposed to represent one gram of gold – in reality it is always less than that. This is true for all gold ETFs, and in fact every other type of ETF also and that’s the reason you should always look for funds with the lowest expense ratios.

In this regard, there are a lot of funds with much lower expense ratios than MOSt gold ETF and these Motilal Goldshares fare worse than them as far as charging expenses to investors are concerned.

However, based on what people have reported here I think you will still get gold coins cheaper from them than you get them from banks – a good way to find out if that is true is to compare the NAV after this ETF lists to the daily prices of gold coins sold by banks and post offices and see how much of a difference is there.

To conclude, I think for someone who is looking to invest in gold electronically, a gold ETF with lower expense and higher liquidity is much better than this fund, but I know from comments here that there is a segment of people who are only interested in buying a gold ETF if it promises to redeem that unit into physical gold and I believe this is a good option for them. The one thing you will have to figure out is after you redeem this for gold units where will you sell them for cash because if you have to take those gold bars or coins to a jeweler and he charges you a deduction again (which they normally do) then you are stuck with yet another expense and it lowers your returns.

How to buy a gold ETF?

This is a very common question here, and a lot of people are confused about what you need to do if you want to buy a gold ETF. An ETF trades like a share in the stock exchange, and if you want to invest in an ETF – you can buy it from your share broker.

It doesn’t matter that this ETF is a gold ETF – it’s all the same – you can still buy it from a share broker. You will be charged the same commission that is charged when you buy any other share, and you will continue to hold it in your Demat account.

You don’t need a separate Demat account or a trading account with the commodities exchange or anything like that – just your regular share trading and Demat account will do.

How to buy a gold etf
How to buy a gold etf

The difference comes in the way shares are taxed and gold ETFs are taxed. For starters, you pay Securities Transaction Tax (STT) on share transactions but you don’t have to pay that on gold ETFs.

Capital gains are also treated differently – shares attract a short term capital gains of 15% whereas short term capital gains on gold ETFs will be added to your income and then taxed according to your slab.

Long term capital gains are tax free for shares, but you will have to pay 10% without indexation or 20% with indexation whichever is lower plus surcharge and cess in the case of gold ETFs. Gold ETFs are still more tax efficient than holding physical gold.

So, in conclusion – as far as buying and holding of a gold ETF is concerned – it’s exactly like a share, but the tax treatment is different.

Gold ETF in India – Performance and Volumes in Last Year

It has been over a year since I wrote my best gold ETF in India post, and since then the number of gold ETFs that are present in India have almost doubled.

There are a total of 11 gold ETFs currently present in India, and 4 out of these 11 were launched within the last year. The big change in this space has been the reduction in the expenses that sponsors charge their customers, and now you can see that almost all of them are on the same footing.

You will still see some performance difference in them because every gold ETF holds a small sum of liquid investments other than gold, and that makes a small difference on their returns.

In this post I will look at the performance, volumes, and expense ratios of all the gold ETFs currently traded in India. I couldn’t find the expense ratios of some of these funds, and instead of waiting out I have published this post now, and will update it as and when I find the information.

First up, here are the names, NSE symbols, 1 year returns as on August 12 2011, and their turnover on the same day.

S.No.NameNSE Ticker1 Year Return as on Aug 12 2011Turnover in Lacs as on Aug 12 2011
1QuantumQGOLDHALF41.0737.11
2UTIGOLDSHARE40.84341.83
3SBISBIGETS41.26397.37
4AxisAXISGOLD15.24
5HDFCHDFCMFGETF288.75
6RelianaceRELGOLD41.08440.82
7ReligareRELIGAREGO41.959.9
8BenchmarkGOLDBEES40.195,490.42
9ICICI PrudentialIPGETF14.17
10KotakKOTAKGOLD40.431,042.38
11Birla SunlifeBSLGOLDETF1.64

Regular readers know that every gold ETF in India holds physical gold equivalent to the number of units that are issued in the market, and their price is thus dictated by the price movements of gold.

Since all these ETFs have the same underlying asset, the price movement is also quite similar.

Here is a chart that gives you a better visual of the performance in the last 1 year. Some of these funds are less than a year old, and that’s why you don’t see any corresponding data against their names.

Gold ETF Returns for 365 Day Period Ending Aug 12 2011
Gold ETF Returns for 365 Day Period Ending Aug 12 2011

Continue reading “Gold ETF in India – Performance and Volumes in Last Year”

Indian ADR List

I wanted to compile a list of Indian ADRs in the US as soon as I did my post on the performance of Indian ETFs listed in the US because I wanted to see if there are enough individual ADRs that someone in the US can buy to get enough exposure to India, and be fairly well diversified as well.

I found that there are only 14 Indian ADRs listed in the US, and a lot of them are not doing very well. Further, they are heavily concentrated in the software, and telecom services sector.

If you wanted to get exposure to India, then I’d say an ETF like INDY is much better than picking a few stocks from the universe of Indian ADRs available to you.

The ADR options are just very limited.

Here is a list of Indian ADRs available in the US along with their ticker, the exchange they are listed in, and the industry they operate in.

S.No.NameTickerExchangeIndustry
1InfosysINFYNASDAQSoftware & Programming
2WiproWITNYSESoftware & Programming
3Patni ComputerPTINYSESoftware & Programming
4Satyam ComputerSAYCYPINKSoftware & Programming
5WNS HoldingWNSNYSEBPO
6Mahanagar Telephone NigamMTNLNYSECommunications Services
7Tata CommunicationsTCLNYSECommunications Services
8Tata MotorsTTMNYSEAuto and Truck
9SifySIFYNASDAQComputer Services
10RediffREDFNASDAQComputer Services
11Sterlite IndustriesSLTNYSEMetal Mining
12Dr. Reddy’sRDYNYSEBiotechnology and Drugs
13HDFC BankHDBNYSEBanking
14ICICI BankIBNNYSEBanking

 

These are the only Indian ADRs that I could find, and if you feel that there are some that I have missed, please leave a comment and I will update my post.

Muthoot Gold ETF Loan

I guess it was only a matter of time before this product was introduced. Muthoot Finance, which is India’s biggest lender against gold has said that they are going to start lending against gold ETFs too.

This was reported by several newspapers last week, and it’s a fascinating development in the gold ETF world. The first thing that came to my mind was that they can’t be worried about fraud at the ETFs if they are willing to accept that as a collateral instead of physical gold.

The second thing was didn’t someone recently ask about something like this?
Gold

About 3 or 4 weeks ago someone had emailed and asked if it was advisable to take a loan against gold, and then buy more gold with it because gold can only go up, right?

My predictable response was that it was a bad idea, but until today I hadn’t realized how bad it was. The Muthoot website shows that currently you can borrow Rs. 1,100 per gram of gold at an interest rate of 12%.

I don’t think it makes any sense at all to borrow at these rates with this little for the purpose of trading in gold! I can understand someone feeling the pinch, and having to pledge their gold to get money, but for trading? I don’t think so.

Business Standard reports that Muthoot is going to allow you to get up to 85% of the gold ETF value for a loan of up to 3 years at a diminishing interest rate of 24%.

I think they might have other options as well where they allow you to take a lower amount for your ETF, and charge a lower rate of interest, but even those should be comparable to the gold loan interest rates, and therefore will be bad to borrow and trade with.

I can understand that gold loans are an important way for some people to tide over rough times, and this will only broaden the options available to such people, and while that makes absolute sense to me; I can’t see this being a good way to leverage up, and trade in gold.

But I know for a fact that a lot of the lending will happen to trade, and especially if everything can be done online. If people have to take print outs of Demat statements, and fill up forms etc. then that acts as a bit of a deterrent and ETF loans for trading may not catch as much appeal as margin trading does, but if it is all online then that is more encouraging.

What happens only time will tell, and hopefully it will prove that I’m being unduly skeptical.

Image by Hair Flick