Guaranteed returns with high cost

Now, you have yet another option to invest in gold. Destimony Securities has launched Gold Reserve Fund, a portfolio management services (PMS) product, investing in gold. The scheme will invest in gold exchange-traded funds (ETFs) of all Sebi-approved mutual funds, along with capital protection. Being a PMS product, its tenure is 60 months and the minimum amount required is Rs 5 lakh.

On maturity, the fund will deliver higher of — the highest account value reached in 41 months, or 105 per cent of the invested amount. Say you invest when gold is at Rs 1,000 per 10-gm level and the highest price (in five years) is Rs 2,000, your maturity value will be calculated according to that price. But if gold prices start falling on investing, you would get 105 per cent of your investment.

Because this product guarantees the NAV (net asset value), it caps your returns. It has to invest in safer instruments such as money market bonds or debt mutual funds.

For a retail investor, the advantage is that he/she won’t need a demat account, which is compulsory for investments in gold ETFs. Even if demat account is an issue, a retail investor has other less expensive options. Asset management companies (AMCs) have been launching gold feeder funds or fund-of-funds, lately, which invest in that particular AMC’s gold ETFs. It allows systematic investment plan (SIP). Minimum investment for lump sum is Rs 5,000 and SIP is available for as low as Rs 100.

Likewise, the cost of the scheme is high. It levies an upfront fee of three-five per cent, fund management fee of 1.25 per cent monthly and a performance management fee of 1.25 per cent, if gain in the account value goes over eight per cent. In comparison, a fund house would charge a maximum of 1.5 per cent, as ETF expense charges.

However, both products would charge an exit load. Where mutual funds charge two per cent on redemptions before completion of one year, Destimony’s product will ask for four per cent.

The product is highly priced — almost double than that of mutual funds. But it comes with a guaranteed return. Invest only your surplus.