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| Mining funds deliver 100% more return than gold ETFs |
| Tinesh Bhasin / Mumbai Feb 26, 2009, 00:13 IST |
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Gold is surely the flavour of the season. Be it investments in gold exchange-traded funds (ETFs) or funds that invest in gold mining companies, investors have made huge profits.
While gold ETFs delivered their all-time high returns in the past three months, mutual fund schemes that invest in gold mining companies gave more than twice that return.
The spike in gold prices and lowering input cost has helped two funds, DSP Black Rock World Gold and AIG World Gold, deliver a stellar 78.19 per cent and 74.79 per cent returns respectively in the past three months.
But despite the performance, investment advisers suggest that investors should not allocate more than 5 per cent of their portfolio to such funds. “The returns of these funds are the function of the rising gold prices. But they are much more volatile in comparison,” said Mukesh Dedhia, director, Ghalla & Bhansali Securities.
When gold prices increase, it essentially means that the demand for gold has risen. In turn, this causes a rally in stocks of gold mining companies worldwide. But when the noble metal declines, these stocks also get hammered.
“Share prices of gold mining companies appreciate at least twice the gold price, when the commodity rallies. But when the yellow metal falls, it leaves the same impact on these stocks,” said a fund manager.
Currently, there are only two such schemes in the country that invest in stocks of gold mining companies worldwide. Both the funds deploy their corpus in international funds that, in turn, invests in equities. DSPBR World Gold invests in Luxembourg-based Black Rock Global Funds-World Gold Fund. AIG invests in Switzerland-based AIG PB Equity Fund Gold.
Apart from the spike in the price of gold, these funds also delivered due to lower inflation and deflation in some countries. The lower prices have helped mining companies save cost on their operations. “With oil, labour and material becoming cheaper, their input cost has gone down, thereby improving operating cash flows,” said Ruchir Parekh, fund manager, AIG World Gold Fund.
But investment advisers feel that this is just a one-time phenomenon. “If you consider the one-year performance of gold and these World Gold funds, the yellow metal has given better returns,” said the head of a wealth management company.
Over a longer period, returns from these funds are moderate. The one-year return of BSPBR World Gold fund has been negative (-19.89 per cent). Similarly, in the past nine months, since its launch, AIG World Gold returns have been -11.45 per cent. Gold ETFs, on the other hand, have delivered 28.61 per cent returns.
Given this volatility, investment advisers suggest that before investing in these funds, one should decide on gold allocation in one’s portfolio. “Out of the total gold allocation, one should invest up to 35-40 per cent in funds and the remaining in gold EFTs,” said Dedhia.
Though the funds invest in equities, they can easily form part of the gold allocation as their taxation structure is similar to gold or debt funds. They being fund of funds, if the investor remains invested for less than one year, the returns will attract short-term capital gains tax. For investments over one year, the gains are taxed either at 20 per cent without indexation or 10 per cent with indexation.
 Rajesh Saluja
CEO & Managing Partner ASK Wealth Advisors
''Investors can expect annualised 10% returns over the next two years. But investors should not bet on gold price'' |
 Hitungshu Debnath
Head, Wealth Management Angel Broking
"Gold should be part of one’s overall portfolio, but this isn’t the right time to enter. ETFs are
the most efficient" |
 S Venkatasubramanian
Head-Wealth Management FCH Centrum Wealth
"Gold can still deliver moderate returns. In case buying gold via ETFs is not viable, one can purchase bars" |
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