To continue to feed Indian investors craze for gold, asset management companies are launching open-ended schemes that will feed investors' money into its previously launched gold ETF.
Asset management company, IDBI Mutual Fund, which has launched a gold fund of funds scheme is the new kid on the block. Targeted mainly at retail investors and individuals without dematerialised (demat) accounts, fund of funds appear to have become the darling of Indian precious metals investors as well as fund houses.
Fund houses prefer to push the gold fund of funds (FoFs) which is available for sale through distributors, and at easier access points for investors.
"The idea is if investors want to take advantage of the improving fortunes of gold mining companies across the globe, they can invest in the gold fund of funds, wherein in some cases the Indian fund invests in the global fund of its parent investment house,'' said Mudkar Shastri, fund house manager.
These are early days though and there are no statistics as yet, to show the growing number of participants in the new category. However, the launch of seven FoFs in less than a year in India is a pointer to its growing interest.
Investors are being told that investment in gold provides better inflation-adjusted returns. "In the last 10 years, gold has beaten the headline inflation rate 8 out of 10 times. It has outperformed and given positive inflation adjusted returns. All the more reason to get into FoFs," said Vipul Jha, fund manager.
In some cases, gold FoFs are mutual funds that invest primarily in gold ETFs from the same sister company. Gold FoFs invest almost 90% in gold ETFs from the sister company, whereas the remaining 10% can be invested in money market instruments or debt instruments.
There are some basic characteristic differences between ETFs and FoFs. For instance, a gold FoF is characterised as a debt fund and charges a higher expense ratio as compared to a gold ETF. Gold ETFs charge a flat expense ratio of 1%. The expense ratio charged by gold FoFs tends to behigher by 25-50 basis points, which includes the ETF management charges.
Though these are the drawbacks, the advantages are said to be many. In the case of a gold ETF, investors are required to purchase a minimum of one unit, which is one gram of gold. Some FoFs offer half a gram or 0.5 unit.
SIP (systematic investment plan) option is available in gold FOFs. There is no option of SIP for gold ETFs - one has to manually initiate the purchase of gold ETF units through the demat account.
STP (straight through processing) transfers are also applicable for gold FoFs. An analyst said with the advent of Swing STP from HDFC and Value STP from ICICI, one can take advantage of Value Cost Averaging in gold FoFs.
"The class of people who invest in gold funds are those with a regular income and want to have SIPs. They are not concerned about higher management fees because they are usually long-term investors. These funds also provide liquidity in the long-term," said Shyam Bhatia, fund manager at a broking firm.
Gold is a great investment asset, added IDBI AMC managing director Debasish Mallick. "We see investment in gold as a component of prudent diversification to hedge against uncertainties, inflation and for long-term benefits," he said. He was speaking at the launch of IDBI's own product.
In the case of IDBI, the investment objective is to generate returns that correspond closely to the returns generated by IDBI Gold ETF that was launched last October. Under the scheme, investors would not hold gold physically and the AMC would keep the equivalent amount of imported gold in its vault with the Bank of Nova Scotia.
IDBI's Mallick added, "We are expecting at least $17 million (Rs 1 billion) during the new fund offer period." It ends August 8.
MARKET PLAY
Surging gold prices have helped FoF schemes generate better returns for investors. At the end of 2011, it was a completely different scenario, with a combination of factors bringing in flat returns.
Out of the six gold FoF schemes at the end of 2011, two have been in existence for more than three years and have grossly underperformed physical gold, said an official at rating agency Icra, "These are AIG World Gold Fund and DSP BlackRock World Gold Fund which returned 13% and 16%, respectively, as compared with gold's 25.5% and 29% return, over their respective periods of existence," he said.
The remaining four - Kotak Gold Fund, Quantum Gold Savings Fund, Reliance Gold Savings Fund and SBI Gold Fund, have been in existence for less than 7 months. While the first scheme underperformed, the remaining three generated marginally higher returns since their launch, he added.
The Icra official said that funds like AIG and DSP BlackRock primarily invest in international funds which, in turn, invest in gold mining companies. "Hence, these funds mimic the performance of mining companies and not that of gold, which could have been the reason for their slide," he added.
