Asset Allocation avenue
And as an asset class, gold over the year has shown a secular uptrend. In 1971, the price of gold was about U.S. dollar 32 an ounce and today (i.e. on February 18, 2011) it is U.S. dollar 1,383.50 an ounce –which indicates that price of gold has gone up by 42 times over the last 40 years. Even in the last 13 years (i.e. since Jan 1998) as depicted in the chart hereunder, till February 18, 2011 gold prices have appreciated by whooping 380% (on an absolute basis).
(Source: World Gold Council, IHB Global Insight)
Whenever, Governments and central banks of the world exhibit financial exuberance, thus raising chances of economic turmoil in the form of ballooning fiscal deficit, inflationary situation, slowing economic growth rate, high unemployment rate etc; smart and prudent investors prefer taking refuge under gold which makes this asset class look bold. And when all such downbeat economic data is released, if the central banks of the world resort to printing more money (in order to take the economy out of the woods), it in effect puts downward pressures on the dominant currency – such as the U.S. dollar, which in turn fuels the upward movement of gold.
In the year gone by (in 2010) too, Euro zone - especially Greece, Ireland and Spain continued to experience burgeoning debt crisis. The U.S. economy too for the major part of the year suffered the pain of high unemployment rate, low economic growth rate and low consumer confidence; which eventually led to stimulus package being announced in the form of QEII, in an attempt to revive their (U.S.) economy. In India the political uncertainty caused due to several scams such as the 2G spectrum scam, Adarsh Housing Society Scam and the housing finance scam, also led to the precious yellow metal becoming bolder (rose by 23%). Moreover, gold merchants also maintained elevated stock levels, as physical demand also remained robust due to several auspicious muhuraths during the year.
Talking about the year ahead, as the U.S. economy is still paper driven (due to QEII announcement), we may witness a weakening of the U.S dollar which may keep an upward bias on the prices of gold (gold prices and the U.S dollar are inversely related to each other). Moreover, interestingly post the QEII announcement we have witnessed a sudden rally in commodities, which may also gather investor's attention to gold. In the Euro zone too – Greece, Ireland and Spain are experiencing a "debt overhang", which reveals that they are still not out of the woods; which may also tempt investors to continue to take refuge in this precious yellow metal thus leading to its secular uptrend kept unharmed. In fact knowing that the economic recovery is wobbly, most economies led by the U.S. and the Euro zone ones are maintaining elevated levels of gold reserves too (as revealed by the chart below), in order to hedge the risk of an economic breakdown.
((Source: World Gold Council, PersonalFN Research)
Hence taking into account the fundamentals for gold presented above, we strongly believe that gold as an asset class makes a strong case for inclusion in one's portfolio (as it would insure / hedge your portfolio against the various risks it is exposed to).
But let's assess whether investing in gold through "Reliance Gold Savings Fund" (RGSF) (a recent introduction to the product portfolio of Reliance Mutual Fund) would be a prudent investment decision.
Positioning of the fund
Primarily let us apprise you that RGSF, is not a gold ETF (Exchange Traded Fund) but in fact the first Gold Fund of Fund (GFoF) in the Indian mutual fund industry. As per its offer document, the investment objective of the fund is "to seek to provide returns of that closely correspond to the returns provided by Reliance Gold Exchange Traded Fund." Hence to simply put, RGSF is positioned as a "feeder fund" which invests its corpus into Reliance Gold Exchange Traded Fund (RGETF), (which in turn invests in physical gold) and its (RGSF's) performance would be closely linked to the performance of the underlying fund - RGETF.
Thus being passively managed, RGSF enables its investors to invest in gold through a paper form, thereby providing the convenience of Systematic Investment Plan (SIP) as well as lump sum investments, but without having its investors to open a demat account to avail its benefits (which is unlike Gold ETFs). Since SIP is a special feature of RGSF, it provides the convenience and advantage of rupee-cost averaging and compounding to its investors. Also since holding a demat account is not necessary, investors would not have to incur charges such as annual maintenance charge for demat account, delivery brokerage charges, transaction charges (while investing in demat mode) etc; thus making it a cost effective investment proposition.
Moreover liquidity too is not restrained by the fund, as investors can subscribe and redeem units on all business days directly from the AMC (while purchase and sale of gold ETFs depends upon the liquidity on the exchange).
Portfolio & Investment Strategy
RGSF's portfolio will predominantly constitute of investments in Reliance Gold ETFs (RGETF), but not ruling out upto 5% allocation towards debt and money market instruments.
*The Fund Manager may invest in liquid schemes of Reliance Mutual Fund. However, the Fund Manager may invest in any other scheme of a mutual fund registered with SEBI, which invest predominantly in the money market securities
(Source: Scheme Information Document)
RGETF too which is the underlying fund, invests in physical gold which shall be of fineness (or purity) of 995 parts per 1000 (99.5%) or higher. Thus RGSF being a feeder fund would be focused providing returns that closely correspond to the returns provided by RGETF.
Performance of the underlying fund - RGETF
So far as revealed by the chart below, RGETF – the underlying fund, since inception (i.e. since November 22, 2007) has provided luring returns of 88.3% on a absolute basis, while 21.5% on a CAGR basis.
(Base: Rs 10,000)
Note: Gold prices are of MCX gold
(Source: ACE MF, PersonalFNResearch)
How GETFs have fared
Performance as on February 18, 2010, Portfolio details are the latest available.
(Source: ACE MF, PersonalFNResearch)
Even when judged in comparison to its peers, the table above reveals that RGETF has delivered competitive returns across time frames and that too without much variation in the tracking error.
Taxation
On the taxation front too as per the present tax laws (Income Tax Act, 1961), investment in RGSF would enable investors to avail the benefit of long-term capital gains tax, after the period of one year of its holding. However, any sale of the fund before the period of 1 year would attract short-term capital gains tax.
It is noteworthy that at present for investment in physical gold, the benefit of long-term capital gains tax is available only after the completion of period 3 years of the asset's holding.
Fund Manager Profile
RGSF will be managed by Mr. Hiren Chandaria who holds a bachelors degree in commerce along with an MBA in finance. Prior to joining the mutual fund arena, Mr. Chandaria was a commodity trader with the proprietary desk of Reliance Capital. He has also been analysing various commodities and working on commodity linked products for Reliance ADA group since November 2005.