Opt for funds with low tracking error & expense ratio

Posted online: Tuesday, Dec 10, 2013 at 0000 hrs
How safe are gold ETFs? If a fund house goes bankrupt, how can I redeem units from a gold ETF?

óRohan Sharma

Many people do get confused on this subject, but, generally, you donít 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, letís 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 unitholderís 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?

óChirag 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 fundís performance is not guaranteed to be exactly the same as the indexís.

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 fundís returns to differ from that of the benchmarkís. However, the most important difference that will eat into your return is a fundís 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?

óRahul 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 stock market transactions as part of its efforts to check fraudulent

practices.

How are long-term capital gains from debt funds calculated (with and without indexation) and how does one pay tax on them?

óSubash Singh

The long-term capital gains on debt funds held for more than a year are liable to be taxed. Long-term gains from debt funds are subject to either 10% flat tax or 20% with indexation (plus applicable surcharge and cess).

You can choose any method that is beneficial for you.

As far as the process of paying the tax is concerned, an individual needs to pay by self as and when the capital gains tax is realised.

How transparent are the NAVs that fund houses quote? Is there a way to verify the accuracy of these figures? Also, who is in charge of monitoring the returns declared by fund houses?

óNitin Chaudhary

Mutual fund houses quote NAV prices on a daily basis, which helps investors know the true worth of their MF investments. The calculation of NAVs is not very transparent as portfolio disclosures do not happen on a daily basis. However, this is not a cause of worry as capital markets regulator, Sebi, has laid out stringent norms and careful practices to ensure no malpractices take place.

Besides, AMCs appoint fund accounting companies to verify and monitor the returns declared by fund houses. Fund accounting service helps asset management firms to reduce errors in NAV calculation and manage overall fund accounting.

Sameer Hassija

The writer is senior investment analyst, Morningstar Investment Management, India