Average return stands 8% in last one year underperforming equity schemes

Though the retail investors continue to bet on gold on ETFs, they have given returns of just 8 per cent on an average in the last one year. During the same period, small- and mid-cap funds, multi-cap funds, mid-cap funds, large- and mid-cap funds have given a return in excess of 15 per cent, according to Valueresearchonline, an MF analysis firm.

The assets under gold ETF grew 26 per cent to Rs 11,477 crore in October from Rs 9,090 crore in October 2011 as against the industry growth of 10.5 per cent. Only Gilt funds’ growth was better than gold funds due to lower base.

Of the 25 gold ETFs and FoFs, 18 have existed for more than a year. HDFC Gold has given the best returns of 10.7 per cent in the category, followed by SBI Gold (9.2 per cent)and ICICI Prudential Gold Savings (8.8 per cent).

A gold exchange-traded fund is an index fund which tracks gold prices. Such a scheme gives investors the benefits of investing in gold without having to physically invest in gold. However, the fund house is required to hold the gold in the physical form on behalf of the investors. A fund of fund acts like a feeder fund of the fund and invests in its own gold ETF.

Higher fee

The management fees of a gold FoF is generally 0.5–0.75 percentage points higher than that of a gold ETF, which have a flat expense ratio of one per cent. This reduces investors’ returns to that extent as compared with that of a gold ETF investor.

However, that is not the only cause of difference in returns of gold FoF and gold ETFs. “Often, the difference in these funds is due to a tracking error which takes place when the fund manager is not able to allocate the portfolio at the right point of time,” said Hiren Dhakan, Associate Fund Manager with Bonanza Portfolio. This means that if a fund manager receives huge cash inflows on a particular day when gold prices fall, and the fund manager is able to allocate only 90 per cent of the flow received into the gold ETF it is feeding into, then the returns generated is only on the amount invested and not on the entire cash flow received. In the case of an ETF, the entire amount received goes directly into the fund.

Despite this, fund house officials expect the demand for gold ETFs and funds to continue in the coming months.

“Investors at this point don’t have many avenues to invest in. Gold prices are likely to rise and, therefore, investors must look at these funds from a long-term horizon.

“There was a strong run-up to Diwali which has revived interest among investors,” said Deepak Chatterjee, Managing Director, SBI Mutual Fund.

The assets under management of gold ETFs stood at Rs 11, 477 crore at the end of October, up 26 per cent from a year-ago period.


(This article was published on November 20, 2012)
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