Indians have always considered Gold as a safer option to invest vis-a-vis other investment opportunities like equities, fixed income, real estate etc. Gold’s ability to act as a hedge in times of financial emergencies is one of the main reasons for the yellow metal to find a favour with Indians. Gold is also believed to be auspicious and in addition to this has proved to be a prudent investment option for a long time now.
In the last few years, we have been seeing a trend wherein young and savvy investors are looking at gold as more of an investment instrument rather than a commodity to be passed onto posterity. Hence, they prefer to invest their surplus into gold via instruments which are hassle-free and are more viable than investing in physical Gold. The mutual fund industry offers multiple alternatives to physical gold if investors wish to take an exposure into the yellow metal.
Gold Exchange Traded Funds (ETF): Currently, Gold ETFs is one of the most popular investment options among investors and this is evident from the AUM of Gold ETFs which stands at Rs. 6414 crore as of March 2014. Gold ETFs directly invest into physical gold and track the spot price of gold. Gold ETFs can be traded on the exchanges and this flexibility makes it a popular instrument. Demat account is compulsory for taking an exposure into Gold ETFs. The only drawback of Gold ETFs is that they have to be bought in lumpsum as a Systematic Investment Plan (SIP) is not available.
Gold Fund of Funds: Fund Houses have launched Gold Fund of Funds for those investors who wish to invest into gold but do not have a demat account. This option invests into Gold ETFs and enables an investor to buy and sell units like any other fund in the industry. One of the biggest advantages of investing in gold Fund of Funds is that it allows an investment via the SIP route which means that the investor can invest in these funds on a regular basis without timing the markets. The SIP investment amount can be as small as Rs. 100 per month.
Gold Equity Funds: Many investors mistake this for a fund which invests into physical gold. However, the truth is that Gold Equity Funds invest into shares of companies which are engaged in extraction, processing and marketing of gold. Currently, there are only 2 funds in the industry which fall into this category and they are DSP BlackRock World Gold Fund and PineBridge World Gold Fund. Since these funds invest into stocks of gold mining companies it is not necessary that whenever there is a rise in gold prices these funds will also move upwards. Although the profits of these companies will be dependent on gold prices, those can be offset by factors like operational issues, labour problems and even regulations. Hence, only investors who have a risk appetite should think of investing into these funds.
To conclude, investors who wish to take an exposure into the yellow metal as a part of their asset allocation should consider Gold ETFs and Gold Fund of Funds. On the other hand, investors who are interested to invest into global funds may consider Gold Equity Funds.
(Source: iFast Financials’ monthly report for May 2014)
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