Gold Fund Of Funds Seen In Demand Of Late
LATE in December, Benchmark Asset Management joined a couple of other mutual funds to file its offer documents with Sebi to launch gold fund of funds (FoF) in India. A FoF is an investment strategy of holding a portfolio of other investment funds.
A gold FoF, which invests in gold exchange-traded funds (ETFs) and reflects its returns, will help investors bet on the yellow metal without maintaining a demat account of a stock broker.
Currently, investors in India can take exposure to gold by buying the metal physically or investing in gold ETFs offered by local mutual funds. Gold ETFs are passively-managed funds, which are listed and traded on stock exchanges, and designed to mirror the returns from physical gold in the spot market. But many investors, who don’t have a demat account, haven’t been able to transact gold ETFs, as buying or selling them can be done only through stock brokers.
Gold FoF attempts to remove this obstacle for investors, who are reluctant to open a demat account. More significantly, investors can use the systematic investment plan (SIP) facility, which involves investing in mutual fund units in regular intervals, to invest in gold units. Mutual funds don’t offer the SIP facility for gold ETFs unlike for equity schemes.
Would recommend gold FoF to clients for its operational advantages more than anything, as not many will be interested in opening a demat just to trade gold ETFs.
Gold was the second most sought-after asset class after equity in 2009, as the metal was considered a hedge against the falling US dollar, sovereign downgrades and inflation. Though the US dollar has rebounded and may remain strong for a while, the popularity of gold is unlikely to decline in 2010, as investors see risks in withdrawal of stimulus by governments worldwide and monetary tightening by central banks.
In India, there are six gold ETFs currently offered by some mutual fund companies and a handful more are in the queue to launch one. For gold FoF, Reliance Mutual Fund and UTI Mutual Fund are the other asset management companies, which had applied to Sebi last year.
But gold FoF is not a product for the cost-conscious investor. Fees for FoF are typically higher than those on regular funds, because expenses include part of the fees charged by the underlying funds.
Any day, a gold ETF is a better product than an FoF, because of the cost advantage, as additional expenses eat into returns. Returns from gold in 2009 have been quite volatile.
