Gold funds glitter : REALLY ??

Gold funds have been the best performing funds in the international funds category. Given that gold is viewed as a safe investment haven, the outlook for gold and gold mining companies remains bullish for the foreseeable future. In India, there are three funds either directly or indirectly invest in gold mining stocks.

Two prominent gold funds, DSPBR World Gold and AIG World Gold, delivered a whopping return of nearly 40 per cent in the last three months. DSPBR Gold, with a track record of over a year, fell just 12 per cent compared to a year ago levels.

This return has also been aided by the fact that the rupee has appreciated over 16 per cent in the last six months, and 28 per cent in the last year. Both these funds beat the benchmark FTSE Gold Mines index substantially, despite its being adjusted to rupee terms.

The returns generated by these funds don’t track the physical prices of gold, but ‘funds of funds’. They invest in overseas funds that invest in stocks of companies engaged in gold and other precious metals mining.

Similar profiles


The DSPBR World Gold Fund invests over 98 per cent of its portfolio in Blackrock Gold Fund, while AIG World Gold Fund invests nearly 86 per cent of its portfolio in AIG PB Equity Gold fund. Both these funds also invest in platinum, silver and diamond mining companies though limiting them to 9-15 per cent of their portfolios.

The return profile of both funds for the last several months has been broadly similar, as they invest in more or less the same set of same stocks. Unlike Gold ETFs, which passively mirror physical gold prices, “gold stock” funds may not always track the performance of physical gold.

Gold funds don’t immediately gain from a rise in gold prices as their performance depends, will in addition, on the earnings of mining companies and on the broader sentiment towards equity markets. In that sense a rise in gold price may translate into gain for gold stocks with a time lag.

Gold funds


The data from the financials of gold mining companies suggests that the cost of producing an ounce of gold has increased considerably over the last few years. But the realised rate per ounce of gold sold has also been increasing proportionately. With the costs now stabilising, the realisations may improve for these companies, which could have positive impact on such stocks.

Investors should note that those looking for a hedge against stock market swings may be better off with Gold ETFs, which faithfully replicate short-term gold price movements.

Gold stock funds, such as the one mentioned above, are for investors who are bullish on gold and are comfortable assuming higher risk, for a higher return from gold stocks.

Good fundamentals for gold, on the back of lower output and higher investment demand and an environment of escalating global uncertainty, augur well for gold-related investments at this juncture.