The Hindu Business Line : DSP ML World Gold Fund: Invest

Investments can be considered in DSP ML World Gold Fund, which offers an exposure to stocks of gold mining companies across the world. With the outlook for gold still strong, the fund has the potential to outperform other equity funds in your portfolio in the near term. However, as stocks of gold mining companies suffer steeper declines when gold prices fall, an active profit booking approach may be necessary. Investors should consider exiting the fund once their target return is met.

Gold stocks vs Gold ETFs

Investing in gold stocks allows investors to benefit from the growth potential of equities and the strong fundamentals of gold. This is the fund’s main investment premise. When gold prices rise, the operating profits of gold mining companies rise by a greater proportion. As a result, stocks of gold mining companies can significantly outperform gold as an asset class. But the reverse is also true. When gold prices decline, these stocks take a much harder knock. Gold ETFs (exchange-traded funds) on the other hand, simply track the price of gold. They are, therefore, less volatile.

As the fund takes exposure to gold stocks, it still carries the risks of equity investing. For those who are looking at diversifying into gold and cutting their exposure to equity, therefore, a gold exchange traded fund (ETF) might be more suitable.

Features: All investments in DSP ML WGF are routed through a feeder fund, Black Rock Global Funds-World Gold Fund, which invests in stocks of predominantly gold mining companies. Black Rock, in which Merrill Lynch holds a 49 per cent stake, manages more than $1 trillion worth of assets across equity, fixed income, alternative investments and real-estate. Black Rock World Gold Fund has an impressive track record, having delivered an annualised dollar return of 25 per cent over the past 10 years, more than twice the return delivered by gold over this period.

Performance review: DSP ML World Gold Fund got off to an impressive start, delivering a 60 per cent return in the first six months following its launch in September 2007. In the last couple of months, however, the fund’s performance has slipped. With gold prices cooling off from their highs, stocks of gold mining companies have begun to under-perform.

The fund has delivered a return of 17 per cent since its launch, while gold has delivered a return of 30 per cent over the past year, in rupee terms. It has, however, still managed to beat its benchmark, the FTSE Gold Mines Series, by a huge margin. The index has delivered a marginally positive return over this 11-month period.

While the price of gold is off its earlier highs, the fund continues to predict a strong rally in gold prices on the back of significant investment demand from Central Banks and investors, as they respond to rising inflation and a weakening dollar.

According to Black Rock, stocks in its portfolio have also underperformed because some mining companies have hedged their recovery prices and have not been able to really benefit from rising prices. With many of these companies de-hedging, they will be better placed to capitalise on the next leg of the gold rally.

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