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Gold Beckons

UTI has come out with a new fund that will invest in equities & related instruments as well as gold

UTI Mutual Fund has plans to come out with a new kind of hybrid fund. The asset management company (AMC) has filed an offer document with the Securities and Exchange Board of India (SEBI) for a new scheme referred to as the UTI Wealth Builder Plan.

According to the offer document, the asset allocation will be between three assets: equity and equity related instruments (65-100 per cent), debt and money market instruments (0-25 per cent) and gold and gold related instruments (0-25 per cent). While the offer document has not stated that it will invest in stocks of gold mining companies abroad, it could well be the case since it specifies that the scheme does not plan to have more than 10 per cent of its net assets in foreign securities. But what it is clear about is that the gold component could include domestic gold exchange traded funds (Gold ETFs). This would most probably be restricted only to its Gold ETF and not the others in the market. In February 2007, Benchmark AMC launched the country's first Gold ETF. The very next month UTI AMC launched UTI Gold ETF which delivered a one-year return of 37.36 per cent as on June 6, 2008. Currently, we have five Gold ETFs as well as two gold funds which invest in stocks of gold mining companies.

The benchmark (or benchmarks, rather) for UTI Wealth Builder Plan is interesting. BSE 100 is the benchmark for the equity component of the portfolio while CRISIL Bond Fund Index will serve the debt portion. The price of gold, as per SEBI regulations for Gold ETFs in India will, be the benchmark for the gold component of the portfolio. Why equity and gold? Gold tends to have an inverse relationship with the equity market. The U.S. economic slowdown, the credit crises and the instability of the dollar have hit equity markets across the globe. Investors are flocking to gold to diversify their portfolio and bring in some stability. Back home we can see the impact. In the March 2008 quarter, there was a steep fall in the performance of all the categories of equity funds. However, DSPML Gold Fund (which invests in global gold mining companies) was the exception with a return of 13 per cent in that quarter.