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| Capitalstars Investment Advisor |
Gold as an asset class has performed well last year as it delivered a return of 28% in 2019. Out of the multiple options offered by mutual funds to allow investors to invest in gold or related instruments, world gold funds have outperformed them all in 2019. World gold funds invest in units of funds that in turn invest in the stocks of gold mining companies listed overseas. Currently, there are two such funds available to investors- DSP World Gold and Kotak World Gold. DSP World gold fund delivered a return of 35 percent while Kotak World Gold fund delivered a return of 41 percent in 2019. Apart from world gold funds, mutual funds offer gold exchange-traded funds (ETFs), gold funds that invest in units of ETFs. Both Gold ETFs and gold fund-of-funds invest in physical gold therefore they delivered return close to physical gold.
Let's understand the reason for outperformance for world gold funds and should you be investing in them.
“Gold equities have a high beta to the gold prices, said Anil Ghelani, head of passive investments and products at DSP Mutual Funds. Gold mining companies expand with the increase in the earning potential which has a high beta to gold prices, he added. He also highlighted the risk that these companies are open to much sharper decline than gold prices.
In 2015, when domestic gold prices corrected by around seven percent, these funds registered a much sharper decline. DSP World gold fund delivered a negative return of 18 percent while Kotak World Gold fund posted a negative return of 24 percent.
Therefore, this basically shows the high sensitivity of the share prices of the gold mining companies to gold prices. Although the current performance may look impressive over long-term their performance may not look as good. The five-year return of DSP World Gold is 5 percent while Kotak World Gold has delivered 2.70 percent over this period while the domestic gold price has moved up around six percent over this period.
Apart from this, as these funds invest in foreign equities, they get the tax treatment of a debt fund that is long term gains (after holding the units for more than three years) will be taxed at the rate of 20 percent post indexation while short-term capital gains (before three years)will be added to the investors income and taxed as per the slab.
Should one invest?
Although experts recommend holding gold to provide diversification to your portfolio but they generally advise to limit the exposure to close to 10-15 percent of your portfolio. Performance of World Gold funds are highly volatile, the rise and fall in the net asset value of these funds may be much sharper than the change in the prices of physical gold. Therefore, it may not be the best option for those looking for investing in gold, say experts.
“Such funds have two layers of risk - one the risk of equities - the fundamentals and earnings of the underlying companies and two the price of gold. Hence, investors need to know that their risk is enhanced in such funds. For those wanting to use gold for diversification and for hedge, gold ETFs or fund of funds is a better option than gold equities." said Vidya Bala, Head of research and co-founder, PrimeInvestor.in.
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