Timing your entry in a rising market could lead to high premium.
With the rise in the gold prices, exchange Traded Funds (ETF) are back in fashion. The recent performance of these funds has been strong and they have delivered good returns for unit holders. This has aroused the interest of a lot of investors. There are, however, some basic factors that make investment in these funds difficult for investors, including sudden and rapid changes in the price trend. Knowing some of these and how to tackle the investment process will ensure a better-informed decision.
GOLD ETF
Exchange traded funds are mutual funds that are traded on a stock exchange just like normal stocks. The benefit of this is that the investor can enter or exit at any point during the day and this gives a wider investment choice in terms of time and price. Gold ETFs invest in gold, so the movement of the price of the fund is in tune with the changes in the prices of gold that is witnessed in the market. The rise in the price of gold has impacted the performance of the schemes. Before rushing to make investments, considering that the amount will be invested in gold, some points need careful attention.
VOLATILITY
If gold funds were considered a place where the investor could put money and then sit back and relax, then think again. There is often little to differentiate a normal mutual fund and a gold ETF when it comes to the issue of the risk involved. The prices of gold fluctuate significantly and this will have a direct impact on movement of the gold ETF. Unlike diversified equity funds, whose performance is balanced because of the varying nature of the holdings, there is a single determinant of the value of the gold fund. On several days, a sharp movement here is common. Data shows that in the best and worst performing months, gold funds have a return in the range of 20-30 per cent both on the positive and the negative side. This is very high and it reflects the extent of volatility in the funds.
ENTRY TIME MATTERS
In many cases, the time period of the investment determines a large part of the performance witnessed by a fund. When it comes to the gold ETF, there is a similar situation because there has to be a proper entry in the investment. Looking at the overall market conditions in gold and the price trends that are visible is important, as it will ensure the investment is made in a proper manner. Even a small change in terms of the time period of investments can make a large difference in the overall returns.
Data from Value Research, a mutual fund research agency, shows that f the investment was made in these gold funds around a year earlier, then as on September 9, the annual return would be an average of 42.30 per cent. This makes these funds the top performing category of funds across all areas. Even if the investment was made two years earlier, then the average annual return would work out to 29.07 per cent, once again the best across categories. Consider a situation where there was a slight delay of around a few months from the one-year period in the investment and in this case the returns would have been drastically different. The last six-month average returns have fallen to around 0.19 per cent, the worst across all categories of funds. Such a sharp change shows that time is vital while making the investment.
SELECTION FACTORS
Overall, several factors need attention in case of a gold ETF. The decision has to be about selecting gold funds as an investment and not a specific gold fund. All funds will show a similar performance with small differences. Investors should be ready for investments that might move sharply during a short time period and then languish for a long period. This requires patience and it also requires looking at the issue of whether there can be a rise in the price of gold and what are the factors that would result in the rise in the price of gold and the funds. This is similar to what an investor would do with any other mutual fund and, hence, this has to be part of the overall evaluation process. Investors should also not expect an unlimited price movement like many equity oriented funds, unless the price of gold rises exponentially. Looking at the possible loss is essential, as there could be a large loss even with gold as an investment. Further, those desiring to own physical gold might find these funds useless, as this is only a cash mechanism based on the price of gold. All these selection factors are important, so that investors do not end with unwanted investments.
The author is a certified financial planner
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Gold mining funds outshine ETFs
While gold ETFs given around 33 per cent returns in the last year, schemes that invest in gold mining companies have done much better. The two gold mining funds – AIG World Gold and DSP Blackrock World Gold have delivered 65 per cent and 55 per cent returns in the same period. The average expense ratio of the gold ETF is around 1 per cent while the figure for the mining companies fund is slightly lower in the past year. |
