AIG Global Investment Group Mutual Fund has launched AIG World Gold Fund (AIG WGF), an open-ended fund of funds scheme that will invest in its parent's international AIG-PB Equity Fund Gold which in turn invests predominantly in gold production, processing and marketing companies around the world. The scheme may in future at the discretion of the Investment Manager, also invest in the units of other similar overseas mutual fund schemes. (View - New Fund Offers open NOW)

Investment expert Sandeep Shanbhag says, "To that extent, it is a product that combines the two themes of geographical diversification and an indirect exposure to gold. Also, a notable feature of the parent fund is that it has beaten its benchmark FTSE Goldmines index for three years as well as five years.”

Why invest in Gold or related securites?
 
“Fundamentally investing in gold and gold related securities is a good idea during the current phase of volatility and risk aversion. Gold prices have shot up in the recent past and traditionally stock prices of gold mining companies are leveraged in the ratio of 1:2  i.e., If gold prices go up by 10%, they jump 20%”, says Shanbhag.

Advisor Hemant Rustagi adds, "The fact that gold as an asset class has low co-relation with equity markets; the fund can be an excellent tool for diversification. Another attraction is the likely upward movement of gold prices thanks to robust demand and stagnant growth in production.”

AIG World Gold Fund v/s Gold ETFs

Rustagi believes that this fund has an edge over Gold ETFs as the portfolio of gold equities is actively managed as against the passive management in the Gold ETFs. However, Shanbhag defers as he says, “At the end of the day, this would still be a stock market investment. If the idea is to invest in gold, Gold ETFs are a much better bet.”

Meanwhile, the fund house argues, “When comparing ETFs vis-à-vis a Fund investing in gold mining companies, one should note that historically the performance of gold mining stocks has been more favorable compared to gold itself. As an example, if one looks at the GDM index, an index of gold miners has moved up close to 6.5 times since the year 2000 as compared to a gold price increase of over 3 times over this period. ETFs are funds that buy actual physical gold reserves and the units sold against these reserves are linked directly to the price of gold. In short, ETFs track the price of gold. And if you were to believe that this historical trend would hold, the best way to play the rising gold price would be to buy gold mining stocks rather than gold itself, and vice versa.”

Risks of investing in AIG World Gold Fund
 
A couple of points that investors should keep in mind are the risk of dollar depreciation as also the tax angle.

Shanbhag elaborates, “As your funds in AIG WGF would eventually be invested in dollar denominated assets, any currency fluctuation would directly affect your rupee return. For example, the US dollar has depreciated against the rupee. Such appreciation of the rupee directly eats into a dollar return and investors should be aware of the currency risk that they undertake when they invest in this fund.”
 
AIG clarifies, “Gold ETFs track Gold prices which are essentially dollar based. Domestic Gold prices are nothing but a function of international prices of gold expressed in US Dollar. Therefore, the currency risk is there in Gold ETFs too, whether one likes it or not.”

From the taxation point of view, this fund will not enjoy the tax benefits that equity funds are eligible for. Long term gains would be taxable at 10% and short term gains would be taxable as per slab rates applicable to the investor, says Shanbhag.
 
AIG agrees but highlights that taxation of Gold ETFs would be the same as that of a fund investing in gold mining companies.

How much can one invest in this fund?
 
Though the fund has its utility in terms of asset allocation, one should invest only a small part of the portfolio in a fund like this, says Rustagi.
 
The fund house too recommends an exposure of around 5-10% in such funds. It says, “As a thumb rule, a fund investing in gold companies has to be viewed as an un-correlated asset to other investments such as diversified equity funds or common stocks. It cannot be viewed as an alternative to them, but as a diversifier in case one has doubts about growth prospects in the near to intermediate term for the general economy as such.”

- Reena Prince

For more Views by Experts click here