Gold has touched a high of 28,000 and continues its upward journey. All the focus is now on this asset class. AMC’s are also actively trying to grab this opportunity as equity market is under pressure. Many AMCs have already launched Gold Funds & recent one is SBI Mutual Fund. Now the point is why gold at this time, when the price of gold has gone up 8 times in the last 10 years and has doubled in last 2 years.
Gold is always looked as a hedge against the inflation and insurance against the global uncertainty. Gold also provides diversification by exhibiting low correlation with other asset class. One should look at this basics and not what has happened in last 10 years. The major reason for gold appreciation, as we all know, is weakening of American Economy, which has forced the central banks to take position in gold instead of dollars. The recent down grade of America & debt crisis in European markets also lead to strong rally in gold price. I do agree that uncertainty still continues but at the same time risk is very high in gold at current level. One needs to take necessary precautions before investing.
Before investing in Gold, one should also know that gold is not an investment, because investment should give you both regular income & price appreciation. Gold never gives you regular income compared to equity which gives you dividend and real estate which gives you rent income regularly .Its appreciation is also based on economic conditions in the world and not because of the fundamentals. One should also not forget that from 1980 to 2000 return on gold was just flat.
As an asset allocation one should invest 5 to 10% in this asset class, preferably through SIPs. The most important is one should look at all their investment and than invest in this asset class and can also take the advice of financial planners, which will help them a lot. The point is why suddenly all the AMCs are coming out with this fund, when they also have their own gold ETF. The fact is we have less than 2 crore demat account holders and out of which 40% are inactive. So they see a huge potential in this sector.
The argument in favor of gold fund is that there is no need of demat account and also you can start monthly SIP in this funds same as other mutual fund schemes. The most important factor i.e. cost structure is ignored while recommending this scheme to retail investors. The cost is 1.5% compared to 0.75% in case of Gold ETFs. You also should know that all Gold Funds would invest in GOLD ETFs, so the returns will be closely to that of ETFs. So the point is why to pay double charges for getting the same return of ETFs. People will also argue that ETFs also have brokerage & demat charges. The reality is brokerage is paid only at the time of buying and selling, but this additional charge of 0.75% will be there every year.
These funds will badly hit to all investors in three cases.
1) Investment made in lump sum of higher value.
2) If return from gold comes high say 15 to 20%
3) Time horizon is 5 years and more.
I strongly believe that if you are serious and really want to invest in gold, than first decide asset allocation & invest only up to 10% of your portfolio. ETF is the best option for investment in Gold. Demat account should not be the major factor deciding the gold investment. It is true that monthly SIP is not available in this but still you can give an open order to your broker or else you can also keep monthly alerts in your mobile or desk top. Think before investing and also note, “ Risk comes from not knowing what you are doing. ”
