VR Logo

Gilded Gains

After the gold rush in 2008 and bull rally in 2009, AMCs are showcasing a combination product

Last year will be remembered by investors as one in which gold prices zoomed. This rally in gold was driven by multiple factors —inflation fears as oil and other commodity prices escalated towards record highs, geopolitical concerns, and the unfolding of the sub-prime debacle in the U.S. which spread all over the world leading to a global economic and financial upheaval.

Naturally, gold turned out to be the most prized possession that an investor could have in 2008. The fund-flow and performance of gold exchange traded funds (Gold ETFs) in 2008 proves this point. And Asset Management Companies (AMCs) were smart enough to capitalize on it.

Last year was particularly bad for AMCs not only in terms of falling markets but even in New Fund Offerings (NFOs). They were unable to bring out new variants of equity funds to attract new money to give an instant boost to their corpuses. In 2008, AMCs were able to raise just Rs 68,033 crore whereas this figure was around Rs 105,073 crore in 2007. Now gold is the bait.

But to woo investors, AMCs are being pretty innovative and combining another asset class along with gold.

Currently in the market there are two types of gold funds. One is the Gold ETF, the other is a gold fund which invests in the stocks of gold mining companies. These are stocks listed on stock exchanges abroad. When you invest in a Gold ETF you need to have a demat account. Not so if you invest in a gold fund.

Another variant on offer is just a gold fund of funds (Gold FoFs). The corpus will be invested in the AMCs own ETF or that of another fund house. But there is a duplication of expenses here — the fund itself would have its own expenses as well as those of the ETF.

What seems to be catching on is the gold-equity hybrid fund popularized by UTI Mutual Fund’s UTI Wealthbuilder II in 2008. Now AMCs like Reliance, Sundaram BNP Paribas, IDFC, Kotak, Religare are launching such funds, as they want to incorporate the best, and worst, of both worlds. The logic being, when equity is on a roll, gold stays subdued and vice versa. So if one asset class  falls, the other is on a high. But investors will have to live with the fact that when one is on a roll, the other will pull it down. For example, an equity fund with gold exposure will not do as well as a pure equity fund in a bull run. 

But this logic is now in question. If one looks at the performance of equity and gold over the past seven years or so, it is clear that at many phases gold has tracked the movement of the equity markets. Hence to assume that gold will outperform when the equity market underperforms is a wrong assumption.