The Hindu Business Line : DSP Merrill moots gold fund

Risks for investors
The fund of funds will depend mostly on MLIIF - WGF, which in turn allocates mainly to equities of companies that are primarily into gold mining
Returns may often depend on changes in exchange rates
A country's inability to meet its financial obligations may also affect returns

Kolkata , Sept. 12

DSP Merrill Lynch MF has proposed to introduce an open-ended fund of funds that will invest chiefly in units of Merrill Lynch International Investment Funds, World Gold Fund. It will be benchmarked against the FTSE Gold Mines index.

Named DSP ML World Gold Fund, the FoF will normally invest at least 80 per cent of its assets in overseas mutual funds while up to 20 per cent may be parked in money market securities or money market/liquid funds managed by DSP ML, the offer document filed with SEBI has mentioned.

MLIIF - WGF is an `Undertaking for Collective Investment in Transferable Securities (UCITS) III Fund' approved by Commission for the Supervision of the Financial Sector, Luxembourg, with Merrill Lynch Investment Managers (Luxembourg) as the management company.

Investment in mining

The fund tries to maximise returns by investing mostly in the equities of companies worldwide whose main business activity is gold mining. It is also free to invest in stocks of companies whose business relates to other precious metals and minerals. It does not hold gold or other metals in a physical form.

MLIIF - WGF (rated AAA by S&P's) has provided an annualised 36.4 per cent over the last 5 years against 25.8 per cent by the benchmark FTSE Gold Mines.

A 2.25 per cent entry load will be charged by DSP ML for regular purchases. In case of units bought through such regular purchase, a 0.5 per cent exit load will be charged if redemption is taken within 6 months. Mr Aniruddha Naha has been named as the fund manager.

It may be mentioned here that SEBI had in April issued certain clarifications on gold funds (Gold ETFs). These pertained to valuation, determination of NAV and expenses.

Special risks

The offer document lists a number of specific factors that investors should be aware of. The FoF will depend chiefly on MLIIF - WGF, which in turn allocates mainly to equities of companies that are primarily into gold mining.

There will be a currency risk as well, as returns to investors will be the result of a combination of returns from investments and from movements in exchange rates. If the rupee appreciates vis-à-vis the US dollar, the extent of appreciation will lead to reduction in the yield to the investor. If it appreciates against the dollar by an amount in excess of the interest earned on the investment, returns can even turn negative.

A country risk will arise from the inability of a country to meet its financial obligations. It is the risk encompassing economic, social and political conditions in a foreign country, which might adversely affect the interests of the FoF.

Also, there may be investments in certain smaller and emerging markets, which are typically poorer or less developed. In fact, substantial limitations may exist in certain countries with respect to MLIIF - WGF's ability to repatriate investment income, capital or the proceeds of sales of securities by foreign investors.

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