Investors will be paid dividends on their investment, while UTI will hedge its gold repayment exposure at the London Metals Exchange (LME). Investors will be returned their gold, or a currency equivalent, at the end of the investment period.

This is how the scheme is expected to work. When an investor deposits gold with the UTI, the trust will sell the metal spot and buy it back forward on the LME. The cash generated from the gold sale will be invested in income or capital gains-yielding assets. The difference between the income earned on the assets and the cost of hedging the gold exposure will be paid out as dividends. The gold itself will be returned to the investor when the scheme terminates.

In order to enable UTI to do some hedging back homeas well, UTI chairman PS Subramanyam has called for the creation of a National Metal Exchange where items like gold and other metals can be hedged. Subramanyam has requested finance ministry officials to look into the possibility of creating such an exchange. He has suggested that the National Stock Exchange (NSE) be asked to set up such an exchange.

NSE managing director RH Patil says that his exchange would be more than willing to set up such an exchange and could set up a separate company for the purpose. In the absence of a secondary market for gold in India, UTI will be forced to hedge its positions on the LME. For this it would need the approval of the Reserve Bank of India. This should not be a problem since corporates have recently been allowed to hedge in the commodity markets internationally. UTI should, therefore, not face much of a problem in getting this approval.

The Gold Fund is expected to be an open-ended scheme with an investment cycle of five to seven years. There will be two investmentoptions for investors. In the first option, investors will deposit their gold with UTI and will get equivalent units in return. In the second option, investors will deposit the currency equivalent of gold (i.e. currency equivalent to the per gram price of gold at the time of investment) and receive units in return.

Gold deposited with UTI will be used for trading on the London Metal Exchange (LME) in gold-linked futures.

"The investor will receive dividends annually. In addition to this, he will receive the capital gain or loss registered in the value of his asset", said Subramanyam. "The value of gold changes over time. It could rise or fall from the day gold is invested in the UTI Gold Fund. For example, if an investor enters the scheme at Rs 4,300 (per 10 gm) UTI will give the investor an equivalent number of units. Now, the price of gold might rise to Rs 6,000 or fall to say Rs 3,000 over a period of time. During the intervening period, the investor will receive dividends each year. Added to this willbe his gain or loss on the gold price over the period of investment", said Subramanyam.

"Gold, when bought and kept with consumers, does not earn any return until it is sold and the commensurate loss or gain is registered with the consumer. In this fund, the customer, apart from still being in ownership of his gold assets, will earn a certain rate of return. Any appreciation or depreciation in the value of gold will be given back to investors", said Subramanyam. He added that the Gold Fund would be one way of channelising savings in the form of gold into productive investment.

Patil went a step further and said that by creating an active secondary market for gold, a large amount of gold held by families could find its way into the market. This would ease the pressure on gold supplies which is today met through imports. The country could save a lot of foreign exchange as well, he said.