​Investing In Gold Using Mutual Funds

Interestingly, gold has been treasured as a valuable commodity for as long as one can remember. From barter trade to jewellery investment and now paper gold, the sheen continues and its universal appeal is intact. Gold has proven to be a safe-haven investment option as well as a good diversifier due to its low correlation with other asset classes such as equity and debt. So even if one or more of the other asset classes are not giving desired returns, gold can still hold up the portfolio’s overall returns. For instance, during the 2008 financial crisis, when the CNX Nifty declined by 52%, gold prices were up by 28%. But lately, investors’ confidence in gold has received a jolt. In 2013, gold prices in India declined 19% primarily due to a stronger dollar and an improvement in risk appetite amid optimism over global economic recovery.​

Note that gold as an asset class can be prone to volatility in the short term. Panicking at such times does not help. Instead, we need to adopt a few precautions to safeguard our investments. Invest for the long term - Gold as an asset class has the potential to deliver optimum returns in the long term (5-10 years or more). For instance, despite the volatility in 2013 (short term), gold has given 15% returns in the 10-year period ended December 31, 2013. Hence, investors should not sell their assets during such volatility but remain invested over the long term. Disciplined investments â€" Do not invest in a haphazard way; for example, you may invest in gold during festive periods, or maybe when you have some surplus money. Now, it may happen that the price of gold has increased during your time of investment (festive and wedding seasons may see a spike in demand and hence prices). Therefore, it is necessary to resort to a disciplined method of investment. With investment in gold now available through the paper form, investors can invest through systematic investment plans (SIPs). ​

How do SIPs help?

 

Investing in any asset class through SIP is an advantage, and the same is true while investing in gold too. 

​​​​​Negate the need to time the market â€" SIPs negate the need to time the market. In timing the market, one can miss the larger rally; one may stay out in a bull phase or may enter when the market is slipping into the bear phase. Investing at regular intervals ensures that one has invested both at the high and the low points of the market. It also helps in averaging out the cost per unit called as ‘rupee cost averaging'.

For example, with Rs 1,000, one can buy 50 units of the underlying asset at Rs 20 per unit or 100 units at Rs 10 per unit depending on whether the market is up or down. More units are purchased when markets are down and fewer units when the market is up, which averages the cost. The longer the time frame, the larger are the benefits of averaging.

Inculcates discipline â€" With SIPs, investors can invest small amounts regularly compared to lump-sum investments which may be impacted by market timing.

Lighter on the wallet - SIPs help investors to choose an investment amount that is within their financial means. This is mainly true for SIPs in mutual funds, which can be as low as Rs 500 per month.

  

Options available in paper gold

 

It is possible to invest in paper gold through gold exchange traded funds (GETFs) and/or gold fund of funds (GFoFs).

  

GETFs 

 

GETFs are open-ended mutual fund schemes (passively managed) which invest the money collected from investors in standard gold bullion (99.5% purity). The investment objective of GETFs is to provide returns that, before expenses, closely correspond to the returns provided by domestic price of gold. However, the performance of GETFs may differ from that of the domestic price of gold due to expenses and certain other factors. The asset allocation of a GETFs is typically 90-100% in gold and 0-10% in money market instruments. Note that investment in GETFs requires opening a demat account with a broker registered with the National Stock Exchange (NSE) or the Bombay Stock Exchange (BSE). In India, assets managed under gold ETFs have increased from Rs 467 cr in December 2007 to Rs 8,784 cr in December 2013. 

  

​​Benefits

 

One, there is no risk of holding physical gold (eliminated the risk of theft) as GETFs are issued in demat form. Two, GETFs are easily affordable - retail investors can even buy just one unit from the exchange. Third, GETFs have high liquidity as they can be easily bought/sold like any other stock on the exchange with transparency in prices.

  

GFoFs

 

GFoFs are open ended fund of fund schemes intended for the investors who do not have a demat account. Their objective is to provide returns that closely correspond to returns provided by the underlying exchange traded funds. The asset allocation of a GFoF is typically 95-100% in gold and 0-5% in money market instruments or gold mining companies. GFoF offers the flexibility of SIPs via mutual funds; thus, investors can invest a fixed sum of money regularly and benefit from rupee cost averaging. There is no exit load and the fund house may levy exit load if redeemed within one year. In case the investor wants to redeem the fund, he/she can do at any time at the applicable NAV. GFoFs basically act as feeder funds aiming to attract investments in GETFs. 

  

Advantages

 

GFoFs provide all the three advantages provided by GETFs - no risk of holding physical gold, affordable and liquid. However, GFoFs are more liquid than GETFs as investors can directly surrender the units to the fund house any time when they wish to get the money back. Another big advantage of GFoFs is that they provide SIP facility. GFoF is a better option for long-term investors who believe in the buy-and-hold philosophy. 

  

Summing up​

 

Though gold as an asset class has seen a sharp decline in 2013, its potential as a safe investment remains unquestioned albeit over the long term. To stay on a safer path and add value to their portfolio, investors would be better off investing in a disciplined manner in the paper form. 

  

Disclaimer:

 

CRISIL Research, a Division of CRISIL Limited has taken due care and caution in preparing this Report. Information has been obtained by CRISIL from sources which it considers reliable. However, CRISIL does not guarantee the accuracy, adequacy or completeness of any information and is not responsible for any errors or omissions or for the results obtained from the use of such information. CRISIL is not liable for investment decisions which may be based on the views expressed in this Report. CRISIL especially states that it has no financial liability whatsoever to the subscribers/ users/ transmitters/ distributors of this Report. CRISIL Research operates independently of, and does not have access to information obtained by CRISIL's Ratings Division, which may, in its regular operations, obtain information of a confidential nature which is not available to CRISIL Research. No part of this Report may be published / reproduced in any form without CRISIL's prior written approval. 

 

This information is given for general purposes only. These views alone are not sufficient and should not be used for the development or implementation of an investment strategy. It should not be construed as investment advice to any party. All recipients / readers of this material should before dealing and or taking any decision of investment are advised to carefully review the Scheme Information Document and consult their legal, tax and financial advisors before making an investment decision. All opinions and estimates included here constitute our view as of this date and are subject to change without notice.

  

Mutual Fund Investments are subject to market risks, read all scheme related documents carefully​​​​​.​​​​​​​​​​