An equity and gold combination sounds good, but the investment strategy is not very clear.
With the stock markets down by over 50 per cent, mutual funds have had to work hard to come up with ideas to keep investors interested. While till a month ago, fixed maturity plans (FMPs) were the flavour of the season, now we have equity-cum-gold fund from UTI Mutual Fund.
The scheme, UTI Wealth Builder Fund Series II, is an open-ended equity diversified scheme that will invest some part of its portfolio in gold to lower the risk associated with equities. The reason: While stock markets have fallen sharply since January, gold exchange-traded funds (ETFs) have returned 9.20 per cent in the last one year.
As far as the yellow metal goes, over a 10-year period, it has given 10.35 per cent compounded average returns, according to a research by UTI Mutual Fund.
The yellow metal is known to be less volatile compared to other asset classes. It hence adds stability to one's portfolio. In times of crisis, investors globally seek solace in gold. By combining these two asset classes, the fund proposes to give the best of both the worlds to the investor. According to Harsha Upadhyaya, fund manager of the scheme, such schemes help investors reduce the hassles of buying gold ETFs separately through a broker.
“Also, when equity markets were performing well, investors only looked at returns. But now, they look at the risk associated with each asset class and want diversification," says Upadhyaya. Like any equity-diversified fund, UTI Wealth Builder Fund Series II invests an average of 65 per cent of its corpus in equities. The remaining money is invested in gold and other debt instruments. Gold investment can, therefore, vary between 0 and 35 per cent. However, there is no clarity on the amount of investment in gold.
While BSE 100 will be the benchmark for the fund, since it dabbles in three different classes, Crisil Bond Fund Index and prevailing gold prices will also act as benchmarks.
As far as taxation goes, the fund will be taxed as an equity fund despite investment in gold. This means that if an investor stays invested with the fund for over a year, there will no long-term capital gains tax.
The entry load is 2.25 per cent and the exit load, if redeemed before a year, is 1 per cent. No exit load will be charged thereafter.
Investment experts are of the opinion that though gold has come to prominence due to the global financial crisis, it should not form more than 5-10 per cent of the overall portfolio. “Since an investor does not have a clear idea about the allocation (of gold), there will be an element of unpredictability about the returns. The fund can underperform more than others, if gold prices drop sharply," said Suresh Sadagopan, a certified financial planner.
Also, most believe that investments in different asset classes should be isolated from each other. This leads to clarity and monitoring is easier. Even the expenses on gold ETFs are 1 per cent a year, whereas this fund charges 2.5 per cent.
