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Gold funds shine with 16.83 per cent returns in a year. But will the lustre last?

Asset managers said that volatility and uncertainty in other asset classes have prompted investors to turn to safe-haven investments like gold funds or ETFs

July 31, 2019 / 02:27 PM IST

The yield from gold funds offered by mutual fund houses has touched 16.83 per cent in the 12 months ending July 30, outperforming equity and debt fund categories.

Gold has a negative relationship with equity. In times of volatility or crisis in the stock markets, gold as an investment performs better than equity, fund managers say.

Present volatility and uncertainty in other asset classes have prompted investors to turn to safe-haven investments like gold funds or ETFs, they say.

“The credit crisis in debt and volatility in equities have prompted investors to turn towards safe-haven investments like gold,” said a fund manager from a bank-sponsored fund house.

Small equity funds have been the worst performers across all categories. This category delivered negative 15.17 per cent returns in the last one year period. In the same period, debt funds have given returns in the range of 0.68 per cent to 10 per cent.


Some fund managers said investors are also diversifying their investments into gold schemes, expecting stable returns.

"Since gold has a very strong negative relationship with equity markets, it makes sense to have some 5-10 per cent in gold ETFs or other investment products as a hedge," a fund manager said.

He also said investors are looking to hold the yellow metal via exchange-traded funds (ETFs) funds, rather than going for physical ownership.

Gold prices have seen an upsurge, riding expectations of monetary policy easing from major central banks to shore up the sagging global economy. Escalating tensions in the Middle East have also added to the safe-haven appeal of gold.

Gold prices have witnessed an uptick in the last one year. In June last year, Mumbai spot bullion was hovering around Rs 31,000/10 gms compared with Rs 35,050/10 gms on July 30, 2019.

Gold ETFs are passive investment instruments that are based on price movements and investments in the metal, offering the convenience of parking money in gold without the burden of its physical ownership. Due to its negative relationship with equity, it is the choice instrument for hedging.

According to fund managers, the appetite for gold ETFs would jump amidst the volatility and also because of the convenience to buy units of gold.

Gold Price Outlook

Gold ETFs seek to provide returns that closely correspond with those provided by holding physical gold.

Fund managers say the gold ETF is the best way to hold the precious metal as these funds track gold prices. Feeder funds invest in units of overseas gold funds, which in turn deploy corpus in shares of companies engaged in the gold mining business.

So, along with gold price movements, feeder funds are also exposed to fluctuations in share prices.

Gold experts say gold prices will continue to rise on the back of geopolitical risks such as the US-Iran tensions and the US-China trade war, and expect it to touch $1500/ounce.

“Gold prices will go up due to the geopolitical risks and trade war. Also, regardless of the Fed’s decision, gold is set to surge. But if the Fed does nothing, you could get a surprise if the equities markets sell off and the buyers come into gold for protection,” said Kumar Jain, vice-president, Mumbai Jewellers Association and Mumbai president of the Indian Bullion Jewellers Association.

“We expect gold to touch $1500/ounce in the next few months,” Jain said. Spot gold was flat on July 31 at $1,430.69 per ounce.

Trade wars are strategies initiated by countries to boost one's exports to other countries and throttling imports from other countries by imposing tariffs and non-quantitative restrictions.
Himadri Buch
first published: Jul 31, 2019 01:53 pm

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