Sundaram Mutual Fund has joined the gold rush by launching Sundaram Equity Plus. The fund aims to invest around 65-85 per cent in equity and a maximum of 35 per cent in gold-exchange traded funds (ETFs). According to the fund house, the scheme will primarily focus on opportunities in Indian equities, with the addition of a gold-ETF providing diversification and exposure to the relative attractiveness of gold in certain phases. Sundaram Equity Plus Fund is an open-ended scheme and will be open for subscription till May 16.
The scheme is the first of its kind, seeking to combine the best performing asset classes of equity and gold into a single product. Last June, Canara Robeco had launched Indigo fund, which invested 35 per cent in gold ETFs and the rest in debt instruments. The fund has given returns of 8 per cent since its launch. The fund house will not charge management charges on the gold part of the portfolio. However, it has an expense ratio of 2.25 per cent for the entire fund, higher than what gold ETFs would charge. Expense ratio for gold ETFs is capped at 1.75 per cent.
The idea to combine two long term players with low correlation appears to be good if one looks at the past track record. But, picking gold for your portfolio is like picking Sourav Ganguly for your IPL team. While the track record is great, the future performance remains a big question mark. The longer your timeframe, the higher the chances of catching the wrong end of the cycle. The gold rally, like Ganguly, is past its prime.
If one looks at comparative returns, gold has outperformed all other asset classes. Much of this outperformance has come due to investors’ loss of faith in the US currency. Following the sub prime crisis and events in 2008, investors flocked gold, pushing prices up considerably. Though the risk aversion has reduced considerably, there are not enough productive avenues available to invest money. This is keeping gold prices high.
However, if the global economic cycle turns for the better, investors will find value for their money in ‘earning assets’ like stocks. This could move the money out of the safety asset, limiting the upside on the yellow metal. When do you think this would happen? That is a question one has to answer before taking the gold call and that would, in turn, decide the call on this fund.
If you think this is not going to happen soon, why not a full gold ETF? One argument given by the fund house is that being a 65 per cent equity fund, investors will be exempt from the tax on capital gains.
However, is a 10 per cent saving on tax reason enough to risk 65 per cent of your money in the worst performing equity market in the world. Indian stock market is already down 7 per cent this year and falling. According to fund managers, the near term outlook is indeed bleak. On Tuesday, the Reserve Bank of India chose to sacrifice growth for inflation by raising policy rates by 50 basis points, which is a big negative for equities. If you are in it for the long term, Indian equities are your best bet for reasons by now known by heart by anyone in the equity markets — long term growth story, demographics, consumption etc.
If you have been a equity investor for the past three years or so, chances are bright that your portfolio might well be looking like the Pune Warriors’ points table. When you have nothing to lose, a bit of Sourav Ganguly could be of some assistance.
