Motilal Oswal MOSt Shares Gold ETF NFO – should you invest?

Motilal Oswal is the latest mutual fund house to join the gold rush by launching its gold ETF (Exchange Traded Fund) – Motilal Oswal MOSt Shares Gold ETF. This is already a crowded space with more than a dozen gold ETFs, but is Motilal Oswal MOSt Shares Gold ETF different than already existing Gold ETFs and should invest in the same?

Motilal Oswal MOSt Shares Gold ETF NFO:

Investment Objective: The investment objective of the scheme is to provide return by investing in gold bullion. Asset allocation will be 95-100 per cent in gold bullion and 0-5 per cent in government securities, money-market instruments and cash.

Subscription: The new fund offer will be open for subscription from March 2 till March 16, 2012.

Minimum investment for the fund is Rs 10,000.

Benchmark: The performance of the fund will be benchmarked to the spot gold price.

Unique Feature: This is for the first time any gold ETF is providing investors the facility to take physical delivery of gold in minimum of 10 gm gold bars.

Physical delivery of Gold: How, Where and When?

Since physical delivery of gold in quantities as low as 10 gram it’s the unique selling point of this fund, we look at this feature in details.

• The physical delivery will be made by the Motilal Oswal AMC in association with India’s largest bullion dealer Riddi Siddhi Bullions that will act as primary authorized participant and market maker.
• The investor can also opt for redemption and take cash by selling the units to Motilal Oswal AMC.
• The physical delivery payout will be in T+5 days as against normal cash redemption in T+2 days, where, ‘T’ stands for transaction day.
• The physical delivery in minimum 10 gm bars will be available across 22 cities in India.
• The tax treatment on capital gains at the time of redeeming the units is similar to that of a debt scheme. Wealth tax won’t be applicable at the time of holding the ETFs.
• There are delivery charges if you redeem gold of less than 1000 grams. You will have to pay Rs 750 per 10 gram of gold, Rs 250 per 100 gram of gold, and nil above 1000 grams.

Some Points Of Caution:

Liquidity Concern: while choosing an ETF, you should look for fund houses with a relatively large asset base, which have high liquidity on the exchanges. If volumes are scarce, there is a risk of the market price of the ETF diverging considerably from the fund’s underlying NAV. This may also place you at a disadvantage both while selling and buying. Right now  Goldman Sachs Gold ETF is the most liquid ETF.

Cost: There is usual cost of de-mat, brokerage charges and securities transaction tax along with additional cost on redemption of physical gold.

Expense Ratio: Lower the expense ratio higher are the returns in case of funds with similar offerings. The proposed expense ratio is 1.3% which is on the higher side when compared to other Gold ETFs which are already listed on Indian exchanges.

Apnplan Recommendation:

Motilal Oswal MOSt Shares Gold ETF is indeed unique in terms of it offers retail buyers to redeem their Gold ETF holding in physical form in quantities as low as 10 grams, but its better to wait and watch if its able to provide sufficient liquidity for trading on exchanges.

Financial Chronicle Verdict: Investment in Motilal Oswal Gold ETF will help retail investors in getting pure physical gold whenever they want, thus, fulfilling investment-cum-consumption needs of the investors, simultaneously. It will also provide gold of high-purity at international spot price prevailing in the market, allowing investors to avoid the 6-17 per cent premium charged by the banks and the jewellers. The other 12 gold ETFs already operational in the market didn’t provide physical delivery below 1 kg, and that too, the option was available only to the authorised market participants. So, it will definitely help the retail investors in getting pure gold at actual prevailing international market price.

Hindu Business Line Verdict: MOSt gold shares may also be a superior option for consumers who now invest in gold-saving schemes of jewellers. The former scores more than gold-saving schemes on a few counts: one, MOSt gold shares promises to give you high quality gold (99.5 per cent purity or 24 carat).

Two, you will get to save on the wastage and making charges that you incur at the jeweller’s.

On the down side, the delivery charge is an additional expense if you redeem MOSt gold shares.