Opt for funds with low tracking error & expense ratio

Dec 10 2013, 10:18 IST
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Many people do get confused on this subject, but, generally, you don’t have to worry. Many people do get confused on this subject, but, generally, you don’t have to worry.
SummaryMany people do get confused on this subject, but, generally, you don’t have to worry.

How safe are gold ETFs? If a fund house goes bankrupt, how can I redeem units from a gold ETF?

—Rohan Sharma

Many people do get confused on this subject, but, generally, you don’t have to worry. Investments in gold ETFs are safe and secure. They are backed with high quality physical gold. In fact, the physical gold is sourced from LBMA (London Bullion Market Association) approved refineries and is of 99.5% purity. As for your concern about the fund house going bankrupt, let’s first understand the structure of mutual funds. In case of gold ETFs, the asset management company (AMC) manages the investments and physical gold assets are held by the custodian. Now, if one of the fund houses goes bankrupt, it does not affect the gold ETF unitholder’s money as the custodian holding the assets is independent of the AMC. Thus, the structure of a mutual fund ensures that the investor is fully protected from contingencies such as bankruptcy. Remember, your ETF units are not owned by the fund house, but by its unitholders. In case of bankruptcy, a gold ETF is liquidated and the money is returned to the unitholders.

Do returns from an index fund always match those from the underlying asset?

—Chirag Sinha

Index mutual funds have portfolios that are constructed to match or track the components of a market index, such as the CNX Nifty. Although an index fund should give you returns in line with its respective benchmark, the fund’s performance is not guaranteed to be exactly the same as the index’s.

Maintaining cash balances, giving effect to corporate actions and rounding off of shares underlying the index are some of operational reasons that cause the index fund’s returns to differ from that of the benchmark’s. However, the most important difference that will eat into your return is a fund’s operating expenses, which is charged by the fund as a percentage of the average assets under management. One should opt for funds with low tracking error and low expense ratios.

Do I have to quote my PAN for investing more than R50,000 in a foreign mutual fund?

—Rahul Kumar

Yes, those investing in any category of mutual funds, including foreign mutual funds, have to furnish PAN details irrespective of the size of their investment. Sebi has made it mandatory to furnish PAN for all

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