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Gold Funds on Anvil

Funds eye gold investments even though its price is falling and markets are rising...

Gold is back in favour! We are not talking about the price of the precious metal, which is on a downward slope at the moment, what we are referring to is its paper equivalent.

A couple of years after the launch of the first gold ETF, there has been a steady, if not noteworthy, rise in their collections. Their, as yet, limited appeal can be gauged from the fact that there are just 6 mutual funds which have considered it fit to launch this product.

That seems to be changing now, with a slew of funds looking to invest in gold and gold-related securities as can be seen from their filings with the Securities and Exchange Board of India (SEBI). However, no such improvement in popularity has happened for gold ETFs.

Investors should note that these new funds are based on gold, but they are not gold ETFs. The primary difference is what the rules ask of investors. In fact, the primary positive behind the issue of such products is that they ask very little of the investors in terms of paperwork.

The second difference between these new funds and gold ETFs is that while gold ETFs invest only in physical gold, these new products, called just gold funds, can also invest in gold mining companies as well - on stock markets.

The asset management companies (AMCs) that are coming up with new gold funds are Reliance, Kotak, UTI, Sundaram BNP Paribas and IDFC. Kotak, Reliance and UTI already have a presence in gold ETFs, the other two have no such funds in their portfolio. These AMC are looking to unveil gold funds, primarily to make it possible for investors to buy without getting involved in the bureaucracy that trading in India entails.

These funds are largely planning to invest in gold and gold-related assets and only a small portion will be in cash and fixed income instruments. The fund from Sundaram BNP Paribas, Sundaram BNP Paribas Gold Plus, however, differs from the rest as it offers 3 schemes within this fund. It has indicated it will be investing variable proportions into gold related securities under its schemes, and keep the balance in equity and equity-related instruments.

Currently, there are 3 more gold funds in existence that invest in gold mining companies - AIG World Gold and DSPBR World Gold that invests through international funds and UTI Wealth Builder Fund - Series II which invests in gold ETFs.

Gold and gold related-securities include physical gold, gold ETFs and stocks of gold mining companies. Gold ETFs hold physical gold in their vaults while their units are traded on the stock exchanges. Each unit represents a certain quantity of physical gold. Investors need to have a demat account to buy gold ETF units.

However, paper- and bureaucracy-wary investors looking to avoid the hassle of opening a demat account will find the new open-ended gold funds quite helpful. No such requirement is mandatory in these new funds. However, if you already have a demat account, then it will not stop you from investing. This official rule by-passing convenience, however, comes at a cost, as these funds will be charging fund management expenses ranging from 0.70 per cent to 2.50 per cent.

Check Out: Gold ETFs

Due to the uncertainties prevailing in global economies, gold, which is considered a hedge against markets volatility, had gained 25.61 per cent in 2008, one of the riskiest years on record when millions of investors and global investment banks had been virtually pauperized due to the worldwide financial crisis. But since the beginning of the current year, as various economies started showing signs of a slight recovery, interest is back in the equity markets. As a result people have been liquidating their positions in the yellow metal and transferring those funds into the stock markets to take a chance and book higher profits that are theoretically available there. As a result, during the 3 months ended May 18, 2009, gold fell 8.65 per cent, while the Sensex gained 58.45 per cent.

But if investing in gold is the primary purpose of investors, then some of these new funds might not be the right choice to achieve the goals they are eyeing. The reason behind that is that these funds' mandate allows them to invest in gold mining companies and as such they will not be able to track the movements in gold prices as closely as they can if they invest in gold ETFs. The stock prices of gold mining companies are also dependent upon a host of other factors apart from gold prices.

What these new funds offer is another way to invest in gold and these may or may not be able to generate the kind of returns investors want. At the moment, as there is no history behind them to gauge their performance, making any surmise about their delivery capabilities would be inappropriate.

Also Read: Dodging the Demat Account