These schemes invest in units of funds that invest in gold mining companies listed overseas.
In 2019, those investors who had bet on gold have had a very satisfying year. Of all avenues to invest in gold directly or indirectly, Gold fund of funds have delivered the best returns. Only two funds are available in this segment in the Indian context – Kotak World Gold and DSP World Gold. These schemes invest in units of funds that invest in gold mining companies listed overseas.
Over the last one year, these schemes have delivered 34 per cent on an average, easily outperforming most other asset classes, including equity mutual funds. In the same period, gold ETFs (exchange traded funds) managed only 21.8 per cent return as a category.
Gold outperforms funds
Kotak World Gold and DSP World Gold have been around for more than 10 years.
Though the recent performance may attract you into investing in these schemes, the long-term charts shown above don’t seem that encouraging. Gold as a commodity has done better than these two schemes. If you had invested Rs 100 in gold in June 2008, it would be worth Rs 316 now. During the same period, the Kotak fund would have become Rs 108, while the DSP scheme’s value would have declined by Rs 2.
It is a good idea to own shares of gold mining companies when there is a boom in the yellow metal’s prices. “There is a strong correlation between gold mining companies and gold prices. Margins of gold miners expand with the rise in gold prices which leads to increase in the earnings potential of these gold mining companies,” says Anil Ghelani, SVP and Head – Product Management, DSP Investment Managers. A weak rupee vis-à-vis the dollar also means that the depreciation would benefit Indian investors as gold prices go up.
“In the coming quarters, we expect that the broader trend for precious metals could continue to remain positive, but the momentum or pace of rally could be a little restricted. The pace of appreciation is expected to be slow as major concerns are now being factored-in by the market,” says Kishore Narne, Associate Director & Head Commodity Business, Motilal Oswal Financial Services.
Many are betting on steady rise in gold prices.
Anuj Gupta, deputy vice-president – commodities and currencies at Angel Broking expects gold to trade in the range of Rs 40000 to Rs 42000 per 10 grams (USD 1550-USD1600 per ounce). Investment demand via ETFs, physical demand for gold, and geo-political tensions in the middle-east should support gold prices, he says.
“Diversification of reserves and investment in gold is bound to increase in a world plagued with high uncertainty and policy irrationality,” said Chirag Mehta - Senior Fund Manager - Alternative Investments, Quantum Asset Management Company.
Gold mining is a cyclical business and so fortunes would fluctuate.
Cyclical and risky
Gold funds do come with their share of risks. “This is a high risk-high reward investment option and only investors who are comfortable with high volatility should consider these funds,” says Anil Rego, founder and CEO of Right Horizons.
Business risks include those pertaining to licenses, workforce availability and mismatch between expected and actual production.
Governments could increase taxation and introduce restrictive environmental rules. These factors affect the profitability of gold miners.
Sentiments in the equity markets also matter. “While the gold equities are positively correlated to gold prices, if the equity markets turn bearish, they could negatively impact the returns as the underlying investment is in equities as an asset class,” says Ghelani.
Should you invest?
“Gold should be looked at as a diversification strategy for black swan events and can be 5-10 per cent of the portfolio as per one’s choice,” says Abhishek Bisen, SVP & Fund Manager-Fixed Income, Kotak Mahindra AMC. Gold can offer some stability to portfolios in volatile times.
“The possibility of a global slowdown and the leveraged balance sheets of governments globally warrant exposure to gold,” says Rego. He recommends investing around two to three percent of one’s portfolio in these schemes and exiting upon getting reasonable returns. Both entry and exit matter in sector funds.
Also, a strong rupee can reduce your returns. Hence, you should account for currency risks.
Being international funds, these schemes are treated as bond schemes. Long-term capital gains (on units held for more than three years) are taxed at 20 per cent after indexation. Short-term capital gains are added to your income and taxed at your slab rate.Consider investing in gold ETFs or gold funds investing in gold ETFs. These would offer you returns in line with gold prices. The former is a low-cost option tracking gold prices. The latter's expense ratios could be higher.Get access to India's fastest growing financial subscriptions service Moneycontrol Pro for as little as Rs 599 for first year. Use the code "GETPRO". Moneycontrol Pro offers you all the information you need for wealth creation including actionable investment ideas, independent research and insights & analysis For more information, check out the Moneycontrol website or mobile app.